Finding better ways

Royal Bank of Canada
2007 Annual Report
Finding
better ways
Royal Bank of Canada (RY on TSX and NYSE) and its on a global basis. Our Global Technology and Operations
subsidiaries operate under the master brand name of RBC and Global Functions teams enable business growth with
and may be referred to in this text as RBC. We are Canada’s expert professional advice and state-of-the-art processes
largest bank as measured by assets and market capitalization and technology. We employ more than 70,000 full- and part-
and one of North America’s leading diversified financial time employees who serve more than 15 million personal,
services companies. We provide personal and commercial business, public sector and institutional clients through
banking, wealth management services, insurance, corporate offices in Canada, the U.S. and 36 other countries.
and investment banking and transaction processing services
Fold Financial highlights 33 Management’s Discussion 110 Consolidated Financial 177 Supplementary
2 Better for our clients and Analysis Statements information
4 Better for our shareholders 34 Overview 111 Management’s responsibility 181 Glossary
6 Better for our employees 38 Accounting and control for financial reporting 183 Directors and executive
8 Better for our communities matters 111 Report of Independent officers
10 Chief Executive Officer’s 43 Financial performance Registered Chartered 184 Principal subsidiaries
message 51 Quarterly financial Accountants 185 Shareholder information
15 Performance compared to information 112 Management’s report on
objectives 53 Business segment results internal control over financial
16 Business discussion 71 Financial condition reporting
21 Chairman’s message 80 Risk management 112 Report of Independent
22 Corporate governance 102 Additional risks that may Registered Chartered
24 Corporate responsibility affect future results Accountants
104 Additional financial 113 Consolidated Balance Sheets
information 114 Consolidated Statements of
Income
115 Consolidated Statements of
Comprehensive Income
115 Consolidated Statements of
Changes in Shareholders’
Equity
116 Consolidated Statements of
Cash Flows
117 Notes to the Consolidated
Financial Statements
Vision Values Strategic goals
• Always earning the right to • Excellent service to clients • To be the undisputed leader
be our clients’ first choice and each other in financial services in
• Working together to succeed Canada
• Personal responsibility for • To build on our strengths
high performance in banking, wealth
• Diversity for growth and management and capital
innovation markets in the United States
• Trust through integrity in • To be a premier provider of
everything we do selected global financial
services
This annual report contains forward-looking statements within the meaning of certain securities laws, including the “safe harbour”
provisions of the United States Private Securities Litigation Reform Act of 1995 and any applicable Canadian securities legislation.
We caution readers not to place undue reliance on these statements as a number of important factors could cause our actual results to
differ materially from the expectations expressed in such forward-looking statements. Additional information about these factors can
be found under “Caution regarding forward-looking statements” on page 33.
Financial
highlights
(C$ millions, except per share 2007 vs. 2006
and percentage amounts) 2007 2006 2005 increase (decrease)
operating performance
Total revenue $ 22,462 $ 20,637 $ 19,184 $ 1,825 9%
Provision for credit losses 791 429 455 362 84%
Non-interest expense 12,473 11,495 11,357 978 9%
Net income 5,492 4,728 3,387 764 16%
Return on common equity (ROE) 24.6% 23.5% 18.0% n.m. 110 bps
Earnings per share (EPS) – diluted $ 4.19 $ 3.59 $ 2.57 $ .60 17%
Capital
Tier 1 capital ratio 9.4% 9.6% 9.6% n.m. (20)bps
Total capital ratio 11.5% 11.9% 13.1% n.m. (40)bps
Risk-adjusted assets $ 247,635 $ 223,709 $ 197,004 $ 23,926 11%
Key drivers
Total loans (before allowance for
loan losses) $ 239,429 $ 209,939 $ 191,914 $ 29,490 14%
Total deposits 365,205 343,523 306,860 21,682 6%
Total assets 600,346 536,780 469,521 63,566 12%
Assets under management 161,500 143,100 118,800 18,400 13%
Assets under administration – RBC 548,200 525,800 417,100 22,400 4%
Common share information
Share price (RY on the TSX)
High $ 61.08 $ 51.49 $ 43.34 $ 9.59 19%
Low 49.50 41.29 30.45 8.21 20%
Close 56.04 49.80 41.67 6.24 13%
Dividends per share 1.82 1.44 1.18 .38 26%
Book value per share 17.58 16.52 14.89 1.06 6%
Market capitalization (C$ millions) 71,522 63,788 53,894 7,734 12%
n.m. not meaningful
Total shareholder return (TSR) (on a $100 investment on November 1, 2002) (1)
$240 2007 2007 vs. 2006 5-year CAGR (2)
$207 2006 16% 19%
$168 2005
$124 2004
$120 2003
Net income
$5,492 2007
$4,728 2006
$3,387 2005
$2,803 2004
$2,968 2003
Diluted earnings per share (EPS)
$4.19 2007 2007 vs. 2006 5-year CAGR (2)
$3.59 2006 17% 14%
$2.57 2005
$2.11 2004
$2.20 2003
Return on equity (ROE)
24.6% 2007
23.5% 2006
18.0% 2005
15.6% 2004
16.7% 2003
Note: All data in Canadian dollars unless otherwise stated.
(1) TSR – Total shareholder return is price appreciation plus dividends reinvested, annualized.
(2) Five-year compound annual growth rate (CAGR).
We are continually striving to do
better for our shareholders by
delivering value to our clients,
providing opportunities to our
employees and making a positive
impact within our communities.
Royal Bank of Canada: Annual Report 2007 1
Clients
Better
means
deeper
relationships.
Whether it is a family seeking their first mortgage, We understand that our clients take different
a small business owner looking to expand paths to success but know that we can play a vital
or a multinational corporation exporting to new role in guiding their journey. Our relentless focus
markets, we continually seek ways to better on communicating and building relationships
understand our clients’ aspirations and goals. based on trust and insight ensures we deliver
value and remain relevant to the people we serve.
2 Royal Bank of Canada: Annual Report 2007
Chief Executive Officer’s message
Our Client First philosophy demands that all Our clients do not stand still and neither can we.
aspects of our operations ultimately benefit While we take heart in our current success,
our clients. Hiring more talented and qualified we know we must always do better.
people, developing simpler processes, and
creating innovative products and services are a
few ways we make it easier for our clients to do
business with us.
3
Shareholders
Better
means
increased
confidence.
We recognize people and institutions have a While our owners range from multi-billion
choice of where they invest their money. dollar mutual funds and pension funds to the
The competition for capital is global and their individual long-term investor, they all demand we
investment decisions reflect whether they demonstrate sound strategy and risk discipline,
have confidence in our ability to deliver returns strong management, as well as excellent and
that are superior to others. ethical execution. We know there is little tolerance
for missteps and we are proud of our long track
record of enviable financial performance.
4
Of all our assets, our integrity is one of our most them with transparent financial and non-financial
valued. As a complex, global financial services reporting and comprehensive disclosure.
company, we recognize that our shareholders Our reputation for leading corporate governance
define return on investment in terms broader practices is cited among the world’s best.
than dollars and cents. They expect us to act We are committed to always working hard to
responsibly and make a positive contribution ensure we reward our investors’ confidence with
to the issues confronting society. We remain superior returns and more reasons to trust their
accountable to all our shareholders by providing capital with us.
5
Employees
Better
means
greater
opportunities.
We believe our people ultimately determine and feedback are essential to building productive
our success. partnerships between our managers and
We believe in enabling performance rather employees. Knowledge sharing is encouraged,
than simply managing it, and we continually and listening to and learning from each other
work to create engaging environments where our is simply made easier with tools such as blogs,
people can perform their best. Active coaching online newsletters, surveys and polls.
6
Providing comprehensive total rewards, Creating a positive environment means
which includes competitive pay and benefits, recognizing and unleashing the power of diversity.
training, career opportunities, and flexible work At RBC, we know our strength comes from the
options, helps enable us to attract and retain sum of the things we have in common – our shared
talented people. values and purpose – and the things that make
each of us different and unique.
7
Communities
Better
means
broader
impact.
We share in the common responsibility to We help our communities by working with
make our communities better. We contribute to organizations and people who inspire others.
their economic prosperity as an employer, as a The RBC Olympians Program is one example:
purchaser of goods and services, as a lender to Athletes, including four-time Canadian Paralympic
small and local businesses, and as a supporter champion Andrea Holmes (shown), act as
of community economic development initiatives community ambassadors and share their past
and local entrepreneurship. experiences and current Olympic dreams with
kids, community groups, clients and employees.
They also work to create awareness and support
8
for amateur sport in Canada and inspire the by building strong partnerships with the
next generation to be physically fit and participate charitable sector.
in sports at any level. We are privileged to be operating in
Through the RBC Foundation, our donations communities around the world that are full of
help create social and economic opportunities that opportunity and potential. We are proud that we
strengthen the communities where we operate. can contribute to their success by supporting the
We are committed to making a lasting social people, programs and agencies that make our
impact through inspired, responsible giving and communities richer places for all.
9
Chief Executive Officer’s message
Finding
better ways
At RBC , we spend significant time and energy advancing We have not been immune to these general market condi-
our vision of “Always earning the right to be our clients’ tions since we are active in the debt and equity markets,
first choice.” Over several years, we have made dramatic largely through our capital markets businesses, and our
changes to all aspects of our operations to make it easier for U.S. banking operations have some exposure to the U.S.
clients to do business with us. We have worked together to real estate market.
make our processes simpler and geared toward helping our
Overall, I am pleased with how we have managed our
clients. We set stringent financial goals and embedded a
businesses throughout 2007. The diversity of our busi-
high-performance culture to drive top quartile performance
nesses across multiple products, markets and geographies
for our shareholders. Our efforts have been met with tremen-
is a significant competitive advantage and it enabled RBC
dous success on all fronts, but like many great organizations,
to deliver solid results in the face of this market disruption.
we know that it is not enough. Ours is a fiercely competitive
Throughout this period, our strong risk management
business and we recognize that as a leader, the contest
practices and our solid capital position not only allowed
for clients, capital and talent never weakens and we must
us to maintain our high credit ratings, but served to assure
always pursue higher standards of growth and achievement.
investors and bolster their confidence in us. Underpinned by
Indeed, we are always finding better ways to exceed the
the continued strength of our balance sheet, I am proud
expectations of our shareholders, our clients and ourselves.
that we have again been recognized as the safest Canadian
In 2007, our shareholders benefited from solid financial bank and the third-safest bank in North America (Global
results that reflected our leadership position in core busi- Finance magazine).
nesses in Canada and our expansion and growth in the
I have confidence in the capabilities of our organization, our
U.S. and internationally. Across RBC , we have succeeded in
management team and our people to continue to respond
numerous growth initiatives, and have taken advantage of
and react in the interests of our shareholders and clients.
opportunities in the Canadian and international markets.
As a result of our efforts and investments made during the
During 2007, we continued to return capital to our share-
past several years, we are looking to the future from a posi-
holders through dividend increases and share buybacks,
tion of strength. Our financial performance is strong, we are
delivering a total shareholder return of 16 per cent.
continuing to make investments necessary for future growth,
Our management depth and operational discipline have and we are trusted and respected as a financial services
helped us weather the turbulent market conditions that provider, an employer and a corporate citizen.
surfaced in the middle of 2007. As issues in the U.S. subprime
I believe that our ability today to serve the needs of
market spilled into other sectors, including high-quality
our clients in every market is as strong as ever and I am
debt markets, they prompted increased volatility, wider
committed to ensuring that our people and our businesses
credit spreads and reduced liquidity in the capital markets.
have the resources to maintain this standard. Our foundation
10 Royal Bank of Canada: Annual Report 2007
Chief Executive Officer’s message
Janice R. Fukakusa, Chief Financial Officer; Charles M. Winograd, Group Head,
Capital Markets; Barbara Stymiest, Chief Operating Officer; Martin J. Lippert,
Group Head, Global Technology and Operations; Gordon M. Nixon, President
and Chief Executive Officer; W. James Westlake, Group Head, Canadian Banking;
Peter Armenio, Group Head, U.S. and International Banking; M. George Lewis,
Group Head, Wealth Management.
11
Our efforts have been met with tremendous success on all fronts,
but like many great organizations, we know that it is not enough.
We must always pursue higher standards of growth and achievement.
for future growth is made stronger by a backbone of central- worked hard to attain top three market shares in all products
ized technology, operations and corporate functions teams and regions. Despite our leadership position and reflective
that allows us to gain economies of scale and foster innova- of our competitive environment, we continue to make invest-
tion. Our brand, which was again recognized as the most ments that will pay dividends in the years ahead. I believe
valuable in Canada (Brand Finance, BrandZ), is an asset that it is important that we not rest on past success, but use our
we know will be vital to our growth plans. We will be building resources to further improve service by renewing our branch
our brand further through targeted advertising and sponsor- network and re-energizing our people. Our clients are not the
ships in the U.S. and U.K., and through several global initia- only ones who see the difference: In 2007, Synovate recog-
tives, including the RBC Environmental Blueprint™ discussed nized us as the best among our largest domestic competitors
on page 30 of this report. In addition, we are taking steps for the service we provide clients in our branches and the
to develop a robust global talent pool as we are mindful value we give them.
that more of our growth will increasingly come from interna-
Our diverse and broad-based capital markets businesses
tional markets.
continued to lead in most elements of the Canadian market,
and we were again named Dealmaker of the Year by the
2007 Strategic goals
Financial Post for providing services to Canada’s leading
In 2007, our people remained focused on our strategic goals:
corporate, government and institutional clients. We
• To be the undisputed leader in financial services in Canada
continued to differentiate our capital markets business from
• To build on our strengths in banking, wealth management
our Canadian peers by leveraging our expertise globally in
and capital markets in the United States
fixed income distribution, energy, mining and metals, the
• To be a premier provider of selected global financial
Canadian dollar, and cross-border mergers and acquisitions.
services.
Our second and third strategic goals describe our ambitions
In the pages of this report, you will read the highlights of our
outside our home market. Over time we expect to continue to
progress toward each of these goals through a variety of
grow our international business to account for approximately
initiatives, each with the common objective of serving our
half of our overall earnings and we continue to invest to help
clients to the best of our abilities.
make this possible. Our commitment to growing our interna-
In Canada, we work hard to be a leader in a fiercely competi- tional business lines is underscored by the fact that we have
tive marketplace. Spurred by our Client First philosophy and completed or announced a total of nine international acquisi-
favourable economic conditions for much of the first half tions worth more than US$4.5 billion since October 2006.
of 2007, all our retail Canadian businesses benefited from
Our progress in the U.S. continues. One source of our
significant volume growth. Our Canadian retail businesses –
strength in the U.S. is our ability to differentiate ourselves in
banking, insurance and wealth management – demonstrated
the banking and wealth management markets by providing
leadership throughout the year, setting an excellent founda-
our clients with the benefit of RBC’s global resources, but
tion for future growth. In Canadian Banking, we grew lending
also stressing the autonomy and decision-making power of
volumes by 11 per cent and deposit balances by 6 per cent.
local management.
Canadian Wealth Management continued its strong perfor-
mance, improving revenue by 13 per cent. And as the While our U.S. banking business must manage the effects of
Canadian industry leader in net sales of long-term mutual the recent downturn in the U.S. real estate market, we are
funds for 16 consecutive calendar quarters, Global Asset committed to our long-term strategy of building a strong
Management revenues grew 17 per cent from last year. retail banking operation in the U.S. Southeast focused on
serving businesses, business owners and professionals. The
We have the broadest national retail presence in Canada –
substantial investments that we have made in our operational
with more branches and automated teller machines (ATMs)
infrastructure over the past couple of years will enable
than any other competitor across the country – and we have
12 Royal Bank of Canada: Annual Report 2007
Chief Executive Officer’s message
further expansion in the region and result in scale and oper- Our core strength in international trust services is helping
ating efficiencies over time. In 2007, we made great strides to drive our success as a top 20 global private bank, and
toward building a targeted banking client base of businesses, we continued to expand our presence by opening several
business owners and professionals. Loans and deposits were new offices during the year. Through our 50 per cent owner-
higher in our U.S. banking operations in 2007, and I am encour- ship in RBC Dexia Investor Services (RBC Dexia IS), we now
aged by the work done to build the foundation for future operate in 15 countries and have been ranked as the top
growth especially in the face of today’s demanding conditions. global custodian by Global Investor magazine and R&M
Consultants for four and three consecutive years, respec-
We have 350 branches in high-growth markets in the
tively. Finally, in Capital Markets, we are a leading player
U.S. Southeast, with 103 branches to be added following
in select niche businesses. For example, we are a leader in
the expected close of our acquisition of Alabama National
alternative currencies and are a top-tier player in infrastruc-
BanCorporation (ANB) that was announced in September. In
ture finance. In addition, we are leveraging our domestic
total, we have used acquisitions and de novo branch openings
expertise to expand our global mining and energy practices.
to expand our current number of branches in the U.S.
by 24 per cent over 2006 with more than 900 additional
2007 Financial results
employees dedicated to serving our U.S. banking clients.
Long-term shareholders will not be surprised that we must
We are continuing to pursue investments that will grow our
leverage our ongoing financial success to cultivate new long-
retail banking business in high-growth markets in the
term growth opportunities for our businesses. For several
U.S. Southeast.
years, we have made it a management priority to ensure
In the U.S. wealth management market, we are the seventh current success was reinvested to fund future growth. This
largest full service brokerage, as measured by number of approach allowed us to deliver relatively solid shareholder
financial consultants ( FCs). We continued to build scale by returns in 2007 while returning capital through increased
enabling our clients to grow their assets by attracting high- dividends and share buybacks. We raised dividends twice in
producing FCs, and acquiring J.B. Hanauer & Co. Finally, in 2007 for a total increase of 26 per cent, and we repurchased
our U.S. capital markets businesses, we have leveraged our 11.8 million common shares. Our capital position is strong
bulge bracket position in Canada to provide expertise and with a Tier 1 capital ratio of 9.4 per cent, comfortably above
product breadth to U.S. mid-market companies. We have our target of greater than 8 per cent.
used acquisitions to expand our capabilities and expertise,
Our diluted EPS growth of 17 per cent, ROE of 24.6 per cent
remaining a leader in municipal finance, and gaining strength
and dividend payout ratio of 43 per cent compared favour-
in both U.S. mid-market issues and the K–12 education
ably to our annual objectives, largely reflecting strong
finance sector.
performance across most of our businesses. Our defined
The most notable development outside Canada in 2007 operating leverage of 2.6 per cent (as shown on page 15)
was the announcement of our agreement to acquire RBTT was below our annual objective of greater than 3 per cent
Financial Group ( RBTT), which will create one of the most reflecting higher costs in support of our growing business
expansive banking networks in the Caribbean with a and investments in future growth initiatives, including
presence in 18 countries and territories across the region. acquisitions.
This will be a truly transformational acquisition for us in the
Our total shareholder return was 16 per cent for the year
region and will extend our reach into many important new
ended October 31, and our three-, five- and 10-year total
markets, notably Trinidad and Tobago, Jamaica, and the
shareholder returns were 25 per cent, 19 per cent and
Dutch Caribbean. Unquestionably, pending a successful
15 per cent, respectively. Relative to our peer group, we deliv-
close, acquiring RBTT significantly advances us towards our
ered top quartile shareholder returns over the past three and
objective to grow outside Canada.
10 years, and second quartile returns over the past five years.
Royal Bank of Canada: Annual Report 2007 13
Chief Executive Officer’s message
How we will measure ourselves in 2008 Our success means finding better ways
We look ahead with some caution, understanding that While the past year has proved relatively successful by many,
current market volatility and uncertainty will impact financial if not all, measures, RBC’s advantage is our unwillingness to
performance. Nevertheless, we remain committed to be satisfied with the status quo. Especially in difficult
generating top quartile total shareholder return in relation to environments, strong players like RBC have the opportunity
our Canadian and U.S. peer group over the medium term. to build on their position of strength to gain clients, increase
market share and grow quality assets by truly differentiating
On page 15, we show our 2008 financial objectives,
themselves. Our long-term investors will see clearly that we
which are based on our three strategic goals and economic
have changed significantly over the past several years in
outlook and are intended to generate strong returns for our
order to better serve our clients.
shareholders.
Our past record of strong performance is the result of our
Objectives for our defined operating leverage, ROE, Tier 1
constantly asking how we can improve: I fully expect that
capital ratio and dividend payout ratio remain unchanged,
our future performance will reflect our reaction to the same
reflecting our continued commitment to strong revenue
question. All our people at RBC are engaged in the response
growth, cost containment, as well as sound and effective
to this challenge, and I am proud that they are always finding
management of capital resources. Our 2008 objective for
better ways to gain our clients’ business and their trust.
diluted EPS growth is 7 to 10 per cent. Our objectives factor
Their continued work leads us to achieve our aggressive
in the effect of our pending acquisitions of ANB and RBTT –
goals and, in turn, should provide our shareholders with
which will be funded partly through issuance of our common
confidence and superior returns.
shares – and related integration costs. The ANB acquisition
is expected to close in early 2008 and the RBTT acquisition I sincerely thank all our clients for their continued business
is expected to close in the middle of the year. We expect and our more than 70,000 employees for their relentless
our provision for credit loss ratio to trend upward toward focus on delivering value for our shareholders and clients
historical averages, in line with our view of the overall credit around the world.
environment.
While Canada’s economy expanded in the first half of
Gordon M. Nixon
2007, our outlook is based on slower economic growth
President and Chief Executive Officer
going forward as a result of weakening credit markets and
the sharp rise in the Canadian dollar. We expect the U.S.
economy to grow in 2008 at the same pace as 2007 as a
result of rising business investment, strong export growth
boosted by the depreciation of the U.S. dollar and continued
consumer spending. We anticipate that financial market
volatility will persist into early 2008 as lenders and inves-
tors remain cautious. In other global economies, we expect
growth to ease moderately in 2008 with China and emerging
Asian countries leading the way.
14 Royal Bank of Canada: Annual Report 2007
Chief Executive Officer’s message
2007 Performance review
The table below shows our 2007 performance compared to our objectives for the year.
2007 Objectives 2007 Performance
1. Diluted earnings per share ( EPS) growth 10%+ 17%
2. Defined operating leverage (1) >3% 2.6%
3. Return on common equity ( ROE) 20%+ 24.6%
4. Tier 1 capital ratio (2) 8%+ 9.4%
5. Dividend payout ratio 40–50% 43%
(1) Our defined operating leverage refers to the difference between our revenue growth rate (as adjusted) and non-interest expense growth rate (as adjusted). Revenue is based on a
taxable equivalent basis and excludes consolidated variable interest entities (VIEs), accounting adjustments related to the new financial instruments accounting standards and Global
Insurance revenue. Non-interest expense excludes Global Insurance expense. This is a non-GAAP measure. For further information, including reconciliation, refer to the Key performance
and non-GAAP measures section.
(2) Calculated using guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI).
2008 Objectives
Objectives
1. Diluted earnings per share ( EPS) growth 7–10%
2. Defined operating leverage (1) >3%
3. Return on common equity ( ROE) 20%+
4. Tier 1 capital ratio (2) 8%+
5. Dividend payout ratio 40–50%
(1) See note (1) above.
(2) Calculated using guidelines issued by the OSFI under the new Basel II framework, which changes the methodology for the determination of Risk-Adjusted Assets (RAA) and
regulatory capital.
Medium-term objective
2007 Performance
Objective 3-year TSR 5-year TSR
1. Total shareholder return (TSR) (1) Top quartile Top quartile Second quartile
(1) Calculated for period ended October 31, 2007, based on share price appreciation plus reinvested dividend income versus the TSR of seven Canadian financial institutions (Manulife
Financial Corporation, Bank of Nova Scotia, Toronto-Dominion Bank, Bank of Montreal, Sun Life Financial Inc., Canadian Imperial Bank of Commerce and National Bank of Canada)
and TSR (in U.S. dollars) of 13 U.S. financial institutions (Bank of America, JP Morgan Chase & Co., Wells Fargo & Company, Wachovia Corporation, US Bancorp, Sun Trust Banks, Inc.,
The Bank of New York Mellon, BB&T Corporation, Fifth Third Bancorp, National City Corporation, The PNC Financial Services Group, KeyCorp and Northern Trust Corporation).
Royal Bank of Canada: Annual Report 2007 15
Chief Executive Officer’s message
Performance compared to objectives
Canadian (C$ millions, except
percentage amounts) 2007 2006
2007 vs. 2006
2005 Increase (decrease)
Banking Total revenue
Net income
$ 12,521 $ 11,696 $ 10,998 $
2,987 2,426 2,007
825
561
7%
23%
Average loans and acceptances 200,000 179,700 160,700 20,300 11%
Average deposits 147,100 139,200 132,500 7,900 6%
Key highlights
• We continued to extend our leading market shares during the year across multiple
product categories including personal loans, residential mortgages, personal
investments, business deposits and loans, and creditor, disability and travel insurance.
This growth was achieved while exercising disciplined pricing and prudent risk
management.
• We grew our deposit base through the introduction of a new personal banking suite
that included several client-centric features, such as multi-product rebates, and a new
high-interest online savings account.
• We continued to expand our distribution strength by adding new bank branches,
insurance offices and ATMs, particularly in high-growth markets, and we renovated and
Canadian Banking provides personal and redesigned many of our existing bank branches to continue to better serve the needs
business financial services in Canada of our clients.
and insurance products and services
internationally. With our leading national
• We deepened our client relationships as reflected by the increasing number of clients
distribution network and the most who have multiple products with RBC.
valuable brand in Canada, we serve
approximately 14 million clients through Achievements in 2007
the country’s most extensive branch • We were ranked first among Canada’s major banks for “Branch Service” and “Value for
and ATM network, our proprietary and Money” by Synovate for our efforts in improving the client experience.
specialized sales forces, online channels
• We gave new clients even more reasons to bank with us as we launched new and
and call centres.
innovative products such as a high-interest online savings account, improved packages
for students and seniors as well as our RBC Rewards® card loyalty program.
• We introduced incentives, including charitable environmental donations, rebates
and discounts, to encourage clients to conduct home energy audits, switch to online
2007 Revenue contribution eStatements, and purchase renewable energy and hybrid vehicles.
• We introduced more convenient and efficient credit and account opening processes for
the business banking market segment while also launching a new flat-fee account and
an account selector tool.
• We won the Bank Insurance Securities Association Award of Excellence for innovation
and leadership in providing our clients with insurance advice, choice and solutions.
Personal Financial Services 41%
Business Financial Services 18%
Cards and Payment Solutions 16% 2008 and beyond
Global Insurance 25%
• We will focus on delivering a superior client experience and helping clients achieve
financial success, allowing us to retain and grow their business.
• We will focus on continuing to improve our processes and revise our business models
to make it easier for our clients and employees to do business at RBC.
• We will focus on delivering relevant advice and solutions to attract new clients to RBC.
16 Royal Bank of Canada: Annual Report 2007
Canadian Banking
Wealth (C$ millions, except
percentage amounts) 2007 2006
2007 vs. 2006
2005 Increase (decrease)
Management Total revenue
Net income
$ 3,992 $
762
3,487 $
604
3,151 $
502
505
158
14%
26%
Assets under administration 488,500 476,500 380,700 12,000 3%
Assets under management 161,200 142,800 118,500 18,400 13%
Key highlights
• We realigned our businesses in February 2007 to create a separate Wealth Management
segment to focus on extending our leadership position in Canada and aggressively
growing in the U.S. and international markets.
• In 2007 we continued to increase our proportion of fee-based revenue, to 53 per cent
of all Wealth Management revenue from 50 per cent in 2006.
• The fastest growing segment in our Canadian wealth management business continues
to be high net worth clients (households with more than $1 million in investable assets).
• We continued to lead the Canadian mutual fund industry in both sales and performance,
outpacing the industry in net sales of long-term funds for the last 16 consecutive
calendar quarters. By continuing to leverage our broad retail distribution network in
Wealth Management comprises businesses Canada and by expanding our third-party distribution, our mutual fund assets under
that directly serve the growing wealth management increased by $13.1 billion, or 19 per cent, over the prior year.
management needs of affluent and high • We continued to build scale in the U.S. and internationally for future growth through
net worth clients in Canada, the U.S. and organic expansion and acquisitions. We offered client solutions from across our
outside North America, and businesses businesses including extending more than US$1 billion in credit provided by international
that provide asset management and wealth management to high net worth clients of our U.S. wealth management business.
trust products through RBC and external
partners. We are a market leader in • We continued to lead the Canadian asset management industry in the development
Canadian wealth and asset management, of innovative products. We were the first major Canadian bank to launch a socially
and have strong and growing businesses responsible mutual fund family through our partnership with Jantzi Research Inc.
in the U.S. and internationally. Our and the first Canadian financial institution to introduce mutual funds with reduced
3,300 financial consultants, advisors, management fees for self-directed investors.
private bankers and trust officers provide
investment advisory and discretionary Achievements in 2007
services, banking, credit and estate and • We were the first in the Canadian full service brokerage industry to surpass $150 billion
trust services to affluent and high net worth in client assets under administration through our Canadian full service broker.
clients. We have a network of 300 offices in • We continued to lead the Canadian mutual fund industry in net sales, more than
20 countries around the world.
75 per cent ahead of the second-place fund company.
• We received the Lipper Award for the “Best Overall Fund Group” in Canada in
recognition of our strong investment performance.
• We acquired J.B. Hanauer & Co., a financial services firm specializing in retail fixed
2007 Revenue contribution
income and wealth management services, expanding our presence in strategic and
desirable New Jersey, Florida and Pennsylvania markets.
• We continued to expand our international wealth management business focused on
high net worth clients, opening offices in several cities, including Mexico City, Beijing
and Santiago.
Canadian Wealth Management 36% 2008 and beyond
U.S. & International • We will continue extending our lead in the Canadian wealth and asset management
Wealth Management 50%
Global Asset Management 14%
markets.
• We will pursue strong organic and acquisitive growth in our existing U.S. wealth
management businesses that serve individual clients and advisors.
• We will focus on expanding our high net worth international wealth management
business in select markets as well as through “bolt-on” acquisitions to complement our
existing operations.
• We plan to expand our asset management business globally, initially through
acquisitions with a focus on U.S. opportunities.
• We will work to continue attracting and retaining experienced advisors, private bankers
and other client facing professionals across all our businesses.
Royal Bank of Canada: Annual Report 2007 17
Wealth Management
U.S. & (C$ millions, except
percentage amounts) 2007 2006
2007 vs. 2006
2005 Increase (decrease)
International Total revenue
Net income
$ 1,915 $
242
1,628 $
261
1,577 $
256
287
(19)
18%
(7)%
Banking Average loans and acceptances
Average deposits
Assets under administration –
22,300
34,200
18,500
28,700
17,200
21,200
3,800
5,500
21%
19%
RBC Dexia IS (1) 2,713,100 2,421,100 – 292,000 12%
(1) RBC Dexia IS represents the total assets under administration as at September 30, 2007, of the joint venture
established January 2, 2006, of which we have a 50% ownership interest.
Key highlights
• We continued to expand our banking footprint in key growth areas in the U.S. Southeast
through targeted acquisitions and de novo branch openings such as:
– We announced our intention to acquire ANB, which would better position us to serve
the banking needs of businesses, business owners and professionals in the key
markets of Alabama, Florida and Georgia in the U.S. Southeast
– We acquired 39 branches in Alabama that were owned by AmSouth Bancorporation
– We added 17 branches in Georgia when we acquired Flag Financial Corporation.
• We took steps to dramatically grow our banking operation in the Caribbean by
announcing our intention in October to acquire RBTT. This transformational acquisition
extends our reach into many important regional markets, notably Trinidad and Tobago,
We provide personal and business banking
Jamaica, and the Dutch Caribbean, and provides the platform for additional growth both
solutions to individuals, businesses,
within and outside the region. The acquisition would create one of the most expansive
business owners and professionals through
350 banking centres in the U.S. Southeast.
banking networks in the Caribbean in 18 countries and territories across the region.
The announced acquisition of Alabama • We realized 12 per cent growth in assets under administration with RBC Dexia IS
National BanCorporation (ANB), expected to underpinned by both new and existing client growth. RBC Dexia IS surpassed
close in early 2008 pending shareholder and $2.7 trillion in assets under administration.
regulatory approvals, will add 103 branches
focused in high-growth U.S. Southeast • Loans and deposits in our U.S. banking operations rose 14 per cent and 8 per cent
markets. (18 per cent and 12 per cent in U.S. dollars), respectively, as a result of acquisitions and
organic growth.
Our Caribbean operations provide banking • Loans and deposits in our Caribbean banking operations rose 10 per cent and
solutions to individuals and businesses
4 per cent (14 per cent and 8 per cent in U.S. dollars), respectively, as a result of
throughout our network of 44 branches in
growth initiatives and favourable business conditions in the region.
eight Caribbean countries and territories.
The announced acquisition of RBTT, which Achievements in 2007
is expected to close in mid-2008 pending
• We made significant investments in our U.S. & International Banking operations,
shareholder and regulatory approvals, will
successfully pursuing strategically important acquisitions in the U.S. Southeast and
add more than 84 branches to our network
throughout the Caribbean. Caribbean that complement our strategy.
• We added a real estate lending team to our Caribbean operations, giving us the
We have a 50 per cent ownership in RBC expertise to better serve clients across the region. In addition, we formed a Small
Dexia IS, which offers a complete range of Business Unit to serve this growing client segment.
investor services, such as custody and fund
administration, to institutions worldwide. • RBC Dexia IS continues to be ranked the world’s number one global custodian in
two leading industry surveys (Global Investor, R&M Consultants) and we achieved
significant new business wins and retentions, including Claymore Investments,
First State Investments (UK) Limited, Guardian Capital Group, HSBC Bank Canada,
Manulife Financial, Swiss Reinsurance Company (Swiss Re) and Université du Québec.
2007 Revenue contribution
2008 and beyond
• We will continue to implement our long-term strategy to become the pre-eminent bank
for business, business owners and professionals in the U.S. Southeast.
• We will focus on efficiently integrating, pending successful close, the ANB acquisition
Banking 60% while retaining and growing our client base.
RBC Dexia IS 40%
• We will focus on successfully integrating, pending successful close, RBTT and our
Caribbean retail banking operations to create the leading bank in the region.
• We will focus on pursuing growth strategies with RBC Dexia IS that include
strengthening our global client franchise, building new value-added products and
expanding our presence in high-potential markets.
18 Royal Bank of Canada: Annual Report 2007
U.S. & International Banking
Capital (C$ millions, except
percentage amounts) 2007 2006
2007 vs. 2006
2005 Increase (decrease)
Markets Total revenue (1)
Net income
$ 4,389 $
1,292
4,136 $
1,355
3,562 $
686
253
(63)
6%
(5)%
Trading revenue (1) 2,021 2,143 1,684 (122) (6)%
Average assets 311,200 260,600 229,100 50,600 19%
(1) Taxable equivalent basis.
Key highlights
• We completed three acquisitions to expand our client base and enhance our capabilities:
– Carlin Financial Group, which provides our clients with a best-in-class North American
electronic trade execution platform
– Daniels & Associates, L.P., a U.S. merger and acquisition advisory firm specializing in
the communications, media and entertainment, and technology sectors
– Seasongood & Mayer, LLC , strengthening our franchise as one of the leading
municipal finance platforms in the U.S.
• We expanded our global infrastructure finance platform and completed significant
transactions in North America, Europe and Australia to be regarded as a top-tier player
in the global infrastructure finance business.
Our diverse capital markets businesses
provide corporate and institutional • We expanded our base metals capabilities, enabling new and innovative transactions,
clients with advice, capital, access to the such as a copper derivative with a notional value of US $1 billion.
world’s financial markets and innovative
• We continued to extend our business in selected markets around the world, including
products to help them achieve their growth
objectives. By leveraging our leadership asset-based lending in Canada, fixed income and structured product distribution in
position in Canada, we have built a strong Asia, and investment banking in the U.S.
and growing U.S. mid-market capital
markets franchise. Outside North America, Achievements in 2007
we have established ourselves as a leading • We remain the leading Canadian investment bank. We were named:
provider of global financial services.
– Dealmaker of the Year in Canada for four of the last five years (Financial Post)
Notable areas of strength include global
fixed income distribution capabilities, – Best Investment Bank in Canada (Global Finance magazine)
structuring and trading, foreign exchange, – Best Canadian Debt House (Euromoney Magazine, 2007)
and infrastructure finance, as well as
broad capabilities in global mining – Number One Foreign Exchange Dealer in Canadian dollars (Euromoney
and energy. Magazine, 2007).
• We continued to hold the leading market share in the Canadian fixed income market and
remain a global leader. We led an $8.1 billion global bond issue, one of the largest to date.
• We extended our leadership position in Australian and New Zealand dollar denomination
bond issuances and retained our premier position in the Alternative Dollar market.
2007 Revenue contribution
• We launched the RBC Hedge 250 Index® on the London Stock Exchange as a joint
venture with New Star Asset Management.
2008 and beyond
• We will strive to remain the Canadian wholesale client’s first choice for all financial
Global Markets 56% products and services.
Global Investment Banking
and Equity Markets 38% • We will leverage our success and continue to diversify into new and complementary
Other 6% areas where we can show competitive strength such as:
– Exporting our infrastructure and project finance expertise from the U.K. to other markets
– Growing our investment banking and municipal finance business in the U.S.
– Investing in our alternative assets and structured products businesses and
expanding our distribution capabilities
– Extending our global energy and mining capabilities
– Leveraging the Carlin acquisition to build out our electronic trading capabilities.
Royal Bank of Canada: Annual Report 2007 19
Capital Markets
Corporate
Support
Achievements in 2007
In partnership with our businesses:
• GTO delivered on more than 319 million ATM transactions, 132 million client calls,
105 million online banking transactions, 2.7 billion point-of-sale transactions and
100 million equity trades.
• GTO focused on enhancing the client experience through improved service levels
and Interactive Voice Recognition changes in our contact centres, redesigning key
processes using Lean Six Sigma techniques, eliminating top client irritants, and
creating an end-to-end client services commitments framework.
• Global Functions contributed to our financial performance by effectively managing
capital, employing innovative strategies to diversify funding sources, enhancing
Global Technology and Operations the productivity and engagement of the workforce, developing successful cost
and Global Functions management initiatives, supporting the businesses in maintaining credit quality and
More than 18,000 employees in Global
our risk profile, and effectively managing our tax position.
Technology and Operations (GTO)
provide the essential information • Global Functions supported enterprise M&A activity by conducting comprehensive
technology and operations capabilities due diligence and negotiations and managing stakeholder relations in all major
necessary to support our diverse transactions, including six international acquisitions.
business activities. In partnership
with our businesses, GTO provides • In November 2007, Global Functions launched the first covered bond program by a
processing and fulfillment support, Canadian issuer, further enhancing our liquidity position and diversifying our access to
direct customer sales and service wholesale funding.
through its contact centres and
technology that enables the delivery of a 2008 and beyond
secure, flexible, reliable and convenient • GTO will enable business strategies by driving innovative process and technology
client experience.
improvements that simultaneously deliver a differentiated client experience and
Our Global Functions support business increased defined operating leverage.
growth by providing the mission critical
• Global Functions will contribute to our financial performance by working to maintain
control management systems, training
and expertise necessary to meet our
a solid balance sheet, sound credit quality and capital ratios, effectively manage our
regulatory, financial reporting, balance tax position, and implement cost-saving initiatives while improving the alignment of
sheet management and corporate business strategies and risk exposures.
funding requirements. Global Functions • By collaborating with our businesses:
also provide leadership related to
critical enterprise assets, including – GTO will work to make it easier for clients to do business with us while enhancing
our people and our brand and contribute client services, executing against our risk and compliance objectives, and ensuring
to the development of the enterprise the safety and soundness of our infrastructure
strategy.
– Global Functions will support business growth by attracting, retaining and
motivating talented employees and maintaining a strong governance and compliance
regime, a relevant and customer-centric brand strategy, enterprise strategy
development, proactive enterprise compliance, and solid relationships with
investors, credit rating agencies, regulators and other stakeholders.
20 Royal Bank of Canada: Annual Report 2007
Corporate Support
Chairman’s
message
Investor confidence is a key element of RBC’s success and your Board of Directors
works hard to earn it. We act as the stewards of the organization, exercising independent
judgment in supervising management and safeguarding the interests of shareholders.
In fulfilling our role, we foster a corporate environment built on integrity and provide
management with guidance in pursuit of our shared goal: maximizing long-term
shareholder value.
RBC’s enterprise is complex, spanning multiple businesses and geographies. Our board’s
diversity of thought and experience enhances our ability to oversee the strategic develop-
ment of a successful global enterprise, understanding and assessing RBC’s competitive
environment, and anticipating the business possibilities and challenges of tomorrow.
The board reviews aspects of RBC’s strategy at every meeting, taking into account the
opportunities and risks of the businesses. We contribute a forward-looking perspective
by participating actively with management in an annual session dedicated to strategic
planning. In reviewing the implementation and success of approved strategic
and operating plans, we regularly monitor RBC’s performance against strategic goals,
approving capital expenditures and major transactions that align with our plan.
We take seriously our responsibility to oversee policies and processes to identify the
principal risks to RBC’s businesses and the systems implemented to manage them.
The board reviews strategies for identifying, prioritizing and managing risk, and for
clearly defining roles and responsibilities. We seek to ensure that management’s plans
and activities are prudent and focused on generating shareholder value within an
appropriate and comprehensive policy framework.
All our efforts are marked by an emphasis on trust and integrity. Our goal is to nurture
the positive values that are already well entrenched in RBC’s corporate culture and to
reinforce the ethical principles on which its reputation and success are founded. In the
board’s view, these are critical to RBC’s long-term success.
RBC’s Board of Directors has long been proactive in adopting leading corporate
governance practices. We remain firmly committed to continuous improvement of
RBC’s strong and effective governance standards. Again this year our approach received
high marks, earning recognition from the Conference Board of Canada, IR Magazine and
The Globe and Mail’s corporate governance rankings.
My goal as non-executive Chairman is to provide independent leadership that will
empower the board to add value. This involves keeping the board focused on its
objectives, cultivating a team approach and encouraging effective participation to
draw the greatest advantage from each director’s individual strengths. One of my
key responsibilities is to ensure that the board is independent-minded and evaluates
matters through a shareholder’s lens. Another ongoing focus is overseeing board
assessment and peer review, as well as our board development program, which further
enhances the board’s understanding of the evolving complexity of financial services
and the financial literacy of all directors. Over the past year, the board participated in
sessions dealing with specialized and complex aspects of RBC’s business operations,
accounting and financial instruments standards, methodologies used in assessing and
controlling risk and the implications of the Basel II Capital Accord.
Your Board of Directors is proud to actively participate in the achievements of Royal Bank
of Canada. On behalf of the board I would like to thank management and all employees
for their strong contribution to RBC’s performance over the past year.
David P. O’Brien
Chairman of the Board
Royal Bank of Canada: Annual Report 2007 21
Chairman’s message
Corporate
governance
Beyond compliance Building on our tradition of excellence
At RBC, sound corporate governance has To maintain our high standards, we continuously review and assess our corporate
long been recognized as an essential governance system. The Board of Directors’ dynamic approach to governance anticipates
element in developing investor confidence.
best practices as they evolve. Over the past few years RBC has adopted many significant
Our approach looks beyond regulatory
leading governance practices:
compliance and builds on our strong
governance fundamentals by incorporating • A policy requiring directors to tender their resignations following the Annual Meeting
best practices to support the Board of if they fail to receive majority shareholder support
Directors’ ability to supervise and advise
management with the goal of enhancing • Increased minimum share ownership guideline for directors to $500,000 from the
long-term shareholder value. previous level of $300,000, to strengthen alignment of their interests with those
of shareholders
Transparency is a key aspect of good
governance and the board takes • Increased minimum share ownership requirements for executive officers to further
seriously RBC’s commitment to clear and align management and shareholder interests. The President and Chief Executive Officer
comprehensive disclosure. Our practices ( CEO) must have shareholdings worth at least eight times the last three years’ average
and policies fully comply with guidelines base salary. The standard for other members of Group Executive is six times the last
established by Canadian securities
three years’ average base salary, except the Head of Capital Markets, who must hold
regulators, as well as applicable provisions
shares worth at least two times the last three years’ average salary plus bonus
of the U.S. Sarbanes-Oxley Act of 2002
and requirements of the New York Stock • A Performance Deferred Share Program to strengthen the alignment of the interests
Exchange and the U.S. Securities and of management with shareholders by tying senior management’s rewards to
Exchange Commission applicable to foreign the performance of RBC relative to a North American peer group of competing
private issuers.
financial institutions
• Limited share dilution resulting from the reduction in the number of stock option grants
awarded to management by approximately 70 per cent since 2003.
In addition:
• Our comprehensive Director Independence Policy has continued to evolve in response
to best practices and regulatory refinements. Under this policy, 15 of the 16 currently
serving directors are independent
• Meetings of independent directors are held regularly
• All members of every committee of the Board of Directors are independent: the Audit
Committee, Human Resources Committee, Corporate Governance and Public Policy
Committee, and Conduct Review and Risk Policy Committee
• For the Audit Committee, more stringent independence criteria have been
implemented, four individuals have been designated as audit committee financial
experts, financial literacy requirements have been defined and a policy limiting the
service of our Audit Committee members on the audit committees of other companies
has been approved
• The Audit, Human Resources, and Corporate Governance and Public Policy committees
have sole authority to retain and approve the fees of independent, external advisors.
The Human Resources Committee retains an independent compensation consultant
• Board and director evaluation procedures have been enhanced, with written peer
reviews added to complement the established peer assessment practice of one-on-one
interviews with the Chairman
• The process of selecting individuals for nomination as directors has been formalized
to ensure that the strengths of potential candidates are weighed against the
competencies and skills that the board as a whole requires.
22 Royal Bank of Canada: Annual Report 2007
Corporate governance
“Our approach looks beyond regulatory compliance and builds on our
strong governance fundamentals by incorporating best practices to
support the Board of Directors’ ability to supervise and advise
management with the goal of enhancing long-term shareholder value.”
David P. O’Brien, Chairman of the Board
Demonstrating leadership 2008 Annual Meeting
These measures build on our previous governance initiatives, which include, among Shareholders are invited to attend our Annual
many others: Meeting at 9 a.m. (Eastern Standard Time)
on Friday, February 29, 2008, at the Metro
• Ensuring independent leadership of the Board of Directors by being first among our peer Toronto Convention Centre, North Building,
companies to separate the positions of Chairman and Chief Executive Officer in 2001 255 Front Street West, Toronto.
• Adopting a policy limiting interlocking directorships of board members in 2002
• Permanently discontinuing grants under the Director Stock Option Plan in 2002
• Being among the first major Canadian companies to expense stock options in financial
statements, which we have done since 2003
• Providing continuous educational material, presentations and programs to directors
so they remain knowledgeable and informed about the ever-changing business and
regulatory environment and the specialized and complex aspects of finance and our
business operations.
Enhancing our disclosure
In keeping with our goals of continuously improving governance and providing greater
transparency and simplicity in our communications, in recent years we have enhanced
disclosure in our Management Proxy Circular, including:
• More detail on the compensation paid to individual directors and their share ownership
• Greater clarity on senior officers’ compensation relative to fiscal year performance
• Three-year, easy-to-read overviews of named executive officers’ compensation
• Aggregate compensation of top executives as a percentage of market capitalization
and a percentage of net income after-tax
• Comprehensive description of how the President and CEO’s compensation is
determined, including performance metrics and weighting
• Details of comparator companies used for benchmarking of both corporate
performance and executive pay
• Increased disclosure regarding executive pensions, including the impact of changes in
interest rates, annual service cost, accrued obligation and value of retirement plans for
top executives.
Important information about our governance practices
The following additional information on our governance practices is available at
rbc.com/governance:
• Our Statement of Corporate Governance Practices and Guidelines
• Our Code of Conduct
• The charters of our Board of Directors and each of its committees
• Our Director Independence Policy
• Position descriptions for the Chairman of the Board, the chairs of committees of the
board, and the President and CEO
• A summary of significant differences between the NYSE rules applicable to U.S.-listed
companies and our governance practices as a non-U.S. issuer
• Our Corporate Responsibility Report and Public Accountability Statement.
Royal Bank of Canada: Annual Report 2007 23
Corporate governance
Corporate
responsibility
At RBC, we believe our first duty is to
operate with integrity at all times so Corporate Economic impact Marketplace
that we can continue to ensure the Responsibility • Provide strong returns to • Develop and provide
Principles: shareholders products responsibly
present and future well-being of our • Pay fair share of taxes • Provide access to basic
stakeholders: clients, employees, investors,
RBC Blueprint for • Support small business banking services
Doing Better™ and community economic • Protect and educate
suppliers, governments, communities
development consumers
and non-governmental organizations. • Foster innovation and
Our strategic approach to corporate entrepreneurship
responsibility and the suite of programs • Purchase goods and services
responsibly
and practices described here serve as the
RBC Blueprint for Doing Better™.
Workplace Environment Community
• Respect diversity • Reduce intensity of • Provide donations with
• Foster a culture of employee operational footprint a lasting social impact
engagement • Promote environmentally • Sponsor key community
• Provide competitive compen- resonsible business initiatives
sation and total rewards activities • Encourage employees
• Provide opportunities for • Offer environmental to contribute
training and development products and services
Recognition
In 2007, RBC was honoured with a number of global awards and recognition for our
corporate responsibility efforts and performance.
Awards
• RBC scored first place in the 2007 Best 50 Corporate Citizens in Canada ranking,
according to Corporate Knights magazine.
• RBC was named one of the world’s top 100 sustainable companies, according to the
third annual “Global 100” ranking announced in BusinessWeek magazine. Companies
on the list were selected from a universe of 1,800 publicly traded companies.
Socially responsible investment indices
RBC is listed on a number of significant Canadian and international indices that help
guide the investment decisions of socially responsible investors, including Dow Jones
Sustainability World Index, the DJSI North America Index, the FTSE4Good Index and
the Jantzi Social Index. Companies on these indices meet stringent social, ethical and
environmental criteria.
Reporting
Increasingly, companies are expected to report on their environmental, social and
governance practices, in addition to their financial results. A range of stakeholders are
asking for this information, yet there are significant differences of opinion about what
companies should disclose, as well as the appropriate degree and manner of disclosure.
For more information, visit RBC has adopted a multi-pronged approach to sustainability reporting. While we follow
rbc.com/responsibility/approach the guidelines suggested by the Global Reporting Initiative, we do not produce a single
printed report covering everything for all stakeholders. Instead, we provide reporting
geared to various stakeholder groups, with an appropriate level of detail for each.
Our external website (rbc.com) is our primary reporting mechanism, where our annual
Corporate Responsibility Report and Public Accountability Statement can be found.
24 Royal Bank of Canada: Annual Report 2007
Corporate responsibility
Code of Conduct
All RBC employees worldwide are governed by our Code of Conduct, which was first established
more than 20 years ago. The Code is reviewed regularly and was updated in 2007, with clarification
of our process for approving and disclosing waivers, increased confidentiality protection
provisions, additional guidelines for conflicts of interest, and updated standards for maintaining
respectful workplaces. All employees are required to take a web-based learning program so that
they know and understand the Code’s principles and compliance elements. The program includes
an online course and a test, which all employees must complete within 30 days of joining RBC and
at least once every two years thereafter. The company’s most senior officers and select others
must complete the program annually.
Ethics Policies
RBC has enterprise-wide compliance policies and processes to support the assessment
and management of risks, including policies to address issues such as economic
sanctions, lending to political parties, money laundering, terrorism financing and
conflicts of interest. Policies and controls are reviewed regularly to ensure continued
effectiveness and alignment with relevant laws and regulations.
Anti-money laundering policy
RBC is strongly committed to preventing the use of our financial services for money
laundering or terrorist financing purposes. In 2007, every RBC employee worldwide,
regardless of their role in the organization, took an anti-money laundering/anti-terrorism
financing course and exam. The course was tailored for each business, function and
geography with material specific to the laws of 38 countries and jurisdictions in which
we operate. Our Global Anti-Money Laundering Compliance Group develops and
maintains policies, guidelines, training and risk assessment tools and models and
A truly sustainable company must have
ethical business practices. At RBC, one
other controls to help our employees protect RBC and our clients, and to ensure we are
of our key values is to operate with trust managing ever-evolving money laundering and terrorism financing risks. Our controls
through integrity in everything we do. in this area incorporate Know Your Client rules established by various regulators to
Our blueprint for ethical behaviour ensure we properly identify our clients and protect against the illegal use of our products
includes a strong foundation of principles, and services.
codes and formal policies designed to
protect consumers, combat corruption,
Crisis management
ensure business continuity, and facilitate
RBC utilizes a best-in-class Business Continuity Management program to ensure that our
reporting of breaches or concerns.
businesses or units are adequately prepared to deal with any disruption of service to its
clients. Risk assessments of all areas are conducted annually and further supported with
contingency plans and periodic testing.
The RBC Enterprise Crisis Management team, consisting of senior executives from
across the organization, is responsible for ensuring continued service to our clients. It is
supported by a global network of regional, business-line and local incident management
teams. These teams are on call around the clock to address any situation that may pose
material risk to staff, corporate reputation or our ability to deliver service to clients.
Regular crisis simulations are conducted to test the readiness and timely response to all
emergency situations.
The RBC Business Emergency Information Line is our link to employees to provide
current updates in the event of a crisis or external situation affecting their ability to
access RBC offices or serve our clients.
Reporting suspected irregularities
RBC has long-established processes that enable employees around the world to report
suspected breaches of our Code of Conduct, other irregularities and dishonesty directly
to our Ombudsman. Employees can report anonymously, confidentially and without fear
of retaliation.
For more information, visit
Specific to financial reporting practices, the RBC Reporting Hotline was established
rbc.com/responsibility/governance
so employees and third parties around the world can anonymously, confidentially and
without fear of retaliation, report suspected irregularities or wrongdoing relating to
accounting, auditing or internal accounting controls directly to the RBC Ombudsman.
Royal Bank of Canada: Annual Report 2007 25
Ethics
2007 Highlights
• Incurred taxes of $2.09 billion worldwide
• Purchased goods and services totalling $4.4 billion from international, national, regional and local
suppliers of all sizes
• Served more than half a million small business clients in Canada, the United States and
the Caribbean
• Promoted innovation, a key driver of the economy, through investments in early-stage technology
companies and support for research-based initiatives
Economic impact Economic development
RBC invests in sustainable economic development, and we are committed to contributing
to the success of people and businesses in the communities where we operate. We support:
• Economic growth in communities where we do business
• Initiatives that help build well-being, wealth and capacity in Aboriginal communities
• Resources to promote economic self-sufficiency
• Financial literacy programs
• Programs that address basic needs, such as food banks.
RBC also promotes economic growth through industry partnerships. For example, we
are a member of the Canadian American Business Council, raising awareness of the
value of the Canada-U.S. trade relationship and enhancing the overall competitiveness
of North American economies.
Small business
Companies both large and small can Small business is an important engine driving economic growth. We are the market
help shape the economies of the leader in Canada, serving almost one in four small business owners. We have over half a
communities and countries in which million small business clients in Canada, the U.S. and the Caribbean.
they do business, simply through their
Financing is essential for many small businesses to start, operate or grow, and
day-to-day business decisions and
actions. RBC aims to have a positive RBC offers a host of credit solutions tailored to meet the needs of diverse businesses
economic impact by providing attractive at various stages. We also strive to provide the best possible products, advice and
returns to shareholders, creating expertise to help this sector prosper.
employment, supporting small business
and economic development, fostering Innovation
innovation and entrepreneurship RBC takes a leadership role in supporting innovation and the commercialization of
and purchasing responsibly. research, and we support projects and organizations that promote learning, innovation
and entrepreneurship, such as:
• The Medical and Related Sciences ( MaRS) project, facilitating research and
development, and its commercialization in Ontario
• The Council for Entrepreneurial Development, promoting high-growth, high-impact
entrepreneurial companies in North Carolina’s Research Triangle region
• Georgia Tech’s Advanced Technology Development Center, a recognized science and
technology incubator that helps entrepreneurs from the U.S. state of Georgia launch
and build successful companies
• The RBC Next Great Innovator Challenge™, which rewards college and university
students from across Canada for innovative ideas related to financial services.
Since 1969, we have brought investment dollars as well as our knowledge and expertise
to budding software and technology companies serving the financial services and other
sectors. We currently have approximately $250 million dedicated to directly invest in
emerging technology companies.
Purchasing
Our procurement policies are inclusive and aim to promote sustainable business
practices and economic development where possible and appropriate. To maintain the
For more information, visit
rbc.com/responsibility/economic highest standards, we review our purchasing policies annually.
We promote fair purchasing practices and strive to support, whenever possible, the
communities in which we operate. We are a founding member of the Canadian Aboriginal
and Minority Supplier Council (CAMSC). RBC has been a member of CAMSC’s U.S.
affiliate, the National Minority Supplier Development Council, since 2002.
26 Royal Bank of Canada: Annual Report 2007
Economic impact
2007 Highlights
• Provided employment to more than 70,000 people worldwide, with $7.9 billion in compensation
and benefits
• Invested $54 million in formal training and development initiatives
• The vast majority of employees are RBC shareholders
Workplace Building mutually rewarding relationships with employees
RBC provides a flexible and competitive Total Rewards program based on an
understanding of what employees value and need. This comprehensive approach
rewards people for their skills and contribution and includes compensation, benefits
and a positive work environment, along with career and learning opportunities.
As our business and workforce continue to grow and become more diverse, offering
choice and flexibility through Total Rewards is even more critical to our success.
Continuous employee growth and development helps ensure we meet current and
future client needs. Employees have access to the training resources and opportunities
they need to learn and grow as professionals. This includes developing employees
to be leaders through the use of key job-related experiences.
The employee savings and share ownership plans that are part of our rewards program
help align employee, investor and company objectives. The vast majority of employees
A talented and highly motivated are RBC shareholders through these programs.
workforce is a key element in our blueprint
Well-informed employees are more likely to align their actions with company goals.
for building a sustainable and successful
future. Consistently ranked as one of
Our senior management team regularly meets with employees to discuss the company’s
the top employers in Canada, RBC strives goals, strategies and progress. Employees have access to company information via
to strengthen our reputation as a quality intranet sites, electronic news magazines, e-mail bulletins and other communication
employer in all countries in which we channels, and are encouraged to provide feedback and comments in a variety of ways.
do business.
RBC has a long history of listening and responding to employee feedback, with
employee opinion surveys dating back to 1981. By understanding employees’ views,
RBC can take action to address their needs and the company’s priorities, which results
in high levels of employee engagement and a strong commitment to clients.
RBC employment worldwide
Fiscal year (ended October 31, 2007) In 2007, we again gathered employee input on our progress in key areas including talent
Canada
management, performance enablement, employee engagement and workplace culture.
54,960
48,837 Diversity for growth and innovation
United States Diversity is one of our core values. We believe that leveraging diversity for growth
12,181
and innovation is both a sound business imperative and the right thing to do for our
11,663
employees, clients and the communities we serve.
Other international
4,619 RBC is a leader in promoting diversity. We regularly sponsor research studies, awards
4,545
and public discourse that promote understanding and draw attention to diversity issues.
Total
71,760
Our annual Diversity Progress Report is available at rbc.com/uniquecareers/diversity/
65,045 progress_reports.html.
Number of employees
Full-time equivalent positions (FTE)
For more information, visit
rbc.com/responsibility/workplace
Royal Bank of Canada: Annual Report 2007 27
Workplace
Marketplace Responding to feedback
Every year, RBC businesses track client satisfaction and use client feedback to make
improvements. For instance, in 2007, client research helped provide direction for these
new initiatives in our Canadian retail banking operations:
• Environmentally responsible product options
• A simplified line-up of savings and chequing accounts with enhanced customer benefits
• High-interest online savings account
• Business banking packages for small businesses
• Enhanced marketing and communication materials for greater relevance.
Product responsibility
Responsible development of products and services
RBC follows a defined, rigorous process before launching any new product or
significantly changing an existing one. We evaluate products for a range of risks and
It’s been said that corporate responsibility
ensure they align with client needs, our Code of Conduct, laws and regulations, and
isn’t so much about how a company voluntary consumer protection codes that we have signed. Approval levels within RBC
spends its money, but how a company correspond to the level of risk identified for a particular product or service.
makes its money. At RBC, our blueprint
Low-carbon banking for consumers
for building sustainable, long-term
relationships with our clients includes
One of our priorities is to provide products and services that help our clients mitigate
responsible practices in the marketplace, their environmental impact. This includes online banking, and electronic statements
such as soliciting and acting on client and bill payment. In Canada, RBC introduced new financial options and incentives for
feedback, providing responsibly our environmentally conscious clients in 2007, including incentives to switch off paper
developed financial products, maintaining statements, have a home energy audit, buy a lower-emission car, and switch to green
vigilant consumer protection measures power. We encourage our clients to use electronic solutions that replace the carbon-
and ensuring access to financial services.
intense activities involved in retail banking such as travel and paper.
Socially responsible investing (SRI)
Increasingly, investors are becoming interested in putting their money where their
values are. In 2007, RBC became the first major Canadian bank to offer investors
this option with the launch of the RBC Jantzi Funds, three funds that are screened for
environmental, social and governance factors. Clients in Canada and the U.S. also have
access to other SRI funds through our network of advisors.
Responding to feedback Responsible lending
Clients surveyed (thousands) RBC provides credit and banking services to companies in many industries. Our policies
2007 cover areas of concern, including environmental issues. For instance, RBC will not
492 support or finance transactions that are directly related to trade in or manufacturing of
135 material for nuclear, chemical, and biological warfare or landmines.
2006
RBC has a number of anti-corruption policies which require us to apply appropriate
415
scrutiny and monitoring measures to high-risk clients whose business activities are
97
known to be susceptible to criminal activity or have been designated as high-risk for
2005
money laundering.
150
98
Canada
United States
28 Royal Bank of Canada: Annual Report 2007
Marketplace
2007 Highlights
• Introduced new, low-carbon banking options for consumers
• Launched the RBC Jantzi Funds, three funds that are screened for environmental, social and
governance factors
• Ranked among the most trusted companies for privacy in Canada by the Ponemon Institute’s
2007 survey
Consumer protection
Privacy and information security
RBC is dedicated to safeguarding the privacy and confidentiality of personal, business,
financial and other information. In fact, it is one of our highest priorities and remains
a cornerstone of our commitment to our clients, employees and other stakeholders.
We have had a formal Privacy Code since 1991, overseen by our Chief Privacy Officer,
and we use vigorous security safeguards and internal controls to ensure the privacy
and security of information entrusted to us. In 2007, we developed a broader, more
holistic framework for managing privacy, information risk, security and records/content
management. RBC ranked among the most trusted companies for privacy in Canada in
the Ponemon Institute’s 2007 survey.
Fraud prevention
RBC has stringent security policies and practices, backed up by around-the-clock
resources to prevent, detect and investigate potential fraud. Online security is a priority,
and our security guarantees help protect online banking and self-directed brokerage
clients from unauthorized transactions. In 2007, we centralized our claims process for
unauthorized transactions, resulting in quicker reimbursement to clients. We upgraded
most of our retail and branch lobby ATMs with anti-skimming devices in 2007. These
devices deter would-be criminals from placing fraudulent skimming devices over the
ATM card slot. We have developed a number of fraud-education initiatives including
up-to-date tips and alerts, brochures and client presentations.
Voluntary codes of conduct
The Canadian banking industry has developed a number of voluntary commitments
and codes to protect consumers, to which RBC has committed. These are listed at
rbc.com/voluntary-codes-public-commitments.
Know Your Client rules
Know Your Client rules are key to investment and banking clients’ protection. Our
employees are required to make all necessary efforts to understand a client’s profile,
financial and personal objectives before making recommendations relevant to their
needs. Our due diligence also covers compliance with applicable securities, consumer
protection, anti-money laundering, anti-terrorism and economic sanctions legislation.
Client complaint process
Our formal process for handling client concerns is outlined on our website and in our
Straight Talk brochures. If clients believe an issue to be unresolved following receipt of
a response from the RBC representative dealing with their concern, they may appeal to
the Office of the Ombudsman, which examines decisions made by RBC companies and
reviews their compliance with proper business procedures. The Office ensures customers
get a fair and impartial hearing and are treated with consideration and respect.
We also respect the dignity and privacy of all parties involved in the proceedings.
Certain disputes that remain unresolved after being reviewed by the Ombudsman may
be directed to a number of agencies and regulators listed on our website and in our
Straight Talk brochures. For more information, visit
rbc.com/responsibility/marketplace
Access to banking services
RBC is committed to providing banking access through customized products and
services to a host of groups who were traditionally underserved.
Royal Bank of Canada: Annual Report 2007 29
Marketplace
2007 Highlights
RBC continued to make progress on how we manage environmental issues through our priority
activities. Highlights include:
• Release of the RBC Environmental Blueprint™, outlining our environmental policy, priorities and
commitments for the next several years
• Launch of our pilot EnergySmart Program designed to enlist employees in reducing energy
consumption in our owned and leased premises
Environment Policy
The RBC Environmental Policy was first developed in 1991 and, since then, periodically
updated to reflect the changing environmental priorities of our company and our
stakeholders. In 2007, our policy was substantially revised. It now more comprehensively
addresses environmental matters pertaining to operations, business activities, products
and services, employees, compliance, reporting and transparency and partnership.
Priorities
To effectively carry out our environmental sustainability mandate, we prioritized our
key environmental issues and activities in 2007 as part of the RBC Environmental
Blueprint™. In selecting our priorities, we considered our potential exposure to, and
influence over, the issue or activity, as well as its importance to our complete array
of stakeholders.
Climate change, biodiversity (including issues related to forests and indigenous
RBC is committed to environmental peoples) and water were selected as our priority environmental issues.
sustainability. We believe that this
commitment has enhanced our Climate change
capacity to conduct business and the Climate change presents environmental, social and financial challenges to the global
RBC Environmental Blueprint™ will
economy, human health and to our own businesses and operations. The two causes of
allow us to continue delivering short-
and long-term benefits for our clients,
climate change are natural systems and human activity, most notably greenhouse gas
employees and the communities in emissions from the combustion of fossil fuels, and large-scale removal of forests and
which we live and conduct business. vegetation. We believe that it is of vital importance that we all contribute to efforts to
reduce greenhouse gas emissions and effectively adapt to the unavoidable impacts of
climate change.
Biodiversity
Biodiversity, or “biological diversity,” refers to the variety of different species, the
genetic variability of each species and the variety of different ecosystems that they
form. Environmental degradation resulting from human activity and the forces of climate
change is disrupting the natural biodiversity of habitats and ecosystems. Critical natural
systems and the abundant biodiversity they support must be preserved in order to
maintain healthy communities, cultural values and shareholder value.
Forests help moderate the climate, provide diverse habitats for species and purify water.
We believe that we must play a part in protecting the integrity of the boreal forests of
Canada and rainforests around the world by supporting sustainable forestry practices.
RBC recognizes that the identity, cultural beliefs and economies of some indigenous
peoples are intrinsically tied to their region’s history, biodiversity and natural landscapes.
We believe that industries operating in these natural areas must consider the effects of their
operations on affected communities, and particularly communities of indigenous peoples.
Water
Water is the most important natural resource on earth, and without it, all life would
cease. Access to clean fresh water, the preservation and management of watersheds
and water conservation are becoming increasingly urgent environmental concerns, both
globally and in many of the regions in which we operate. Climate change, pollution and
inefficient water usage are factors contributing to a growing water crisis. In 2007, we
launched the RBC Blue Water Project, a 10-year, $50 million charitable grant program to
help find global solutions to this crisis and we are exploring opportunities to contribute
solutions through financial products and services as well.
30 Royal Bank of Canada: Annual Report 2007
Environment
2007 Highlights (continued)
• Launch of environmental banking options for clients, helping them make a contribution to the
environment through RBC Homeline®, eStatements, hybrid car financing and green power
• Recognition by Newsweek as the company most capable globally of addressing the risks and
opportunities of climate change
• Recognition by the Carbon Disclosure Project as a leader in understanding and managing
the financial risks and opportunities of climate change
We intend to direct our environmental efforts toward three priority activities that are
important to RBC and our stakeholders:
• Reducing the intensity of our environmental footprint
• Promoting environmentally responsible business activities
• Offering environmental products and services.
Reducing the intensity of our environmental footprint
RBC is committed to continuing to reduce the intensity of our energy use, paper
consumption, employee travel, water use and procurement activities on a per employee
or per square metre basis. In 2007, we improved operating efficiencies through
strategic management of our environmental footprint and realized positive financial
and environmental impact. For example, retrofit lighting in our branch network and the
provision of electronic statements for clients has reduced our consumption of energy,
paper, operational costs and our indirect greenhouse gas emissions.
Responsible business activities
At RBC, we work with our clients and the companies we invest in to mitigate environmental
risks and support environmentally responsible business models. Comprehensive
environmental risk management policies and procedures facilitate the environmental
review of transactions, and we regularly update these policies and procedures to address
regulatory changes, emerging and evolving issues and international best practices.
For example, our Policy on Social and Environmental Review in Project Finance, which
enables us to meet our commitment to the Equator Principles, was amended in 2007 to
reflect new requirements under the revised Principles.
In our lending activities, and as appropriate, environmental issues are assessed
at the following levels: industry, borrower and transaction. Policies require that,
where warranted, transactions are reviewed by internal or third-party environmental
specialists to ensure that environmental risks are appropriately identified and
addressed. Our internal team of environmental experts provides support and expertise
to business and operational units throughout the organization.
Financial products and services
RBC seeks to offer an expanding array of products and services that provide environmental
benefits, are clearly distinguishable from comparable non-environmentally focused
products, and empower clients to reduce their environmental footprint at little or no
additional cost.
We view environmental markets – including renewable energy, clean technology, and
emissions trading – as an emerging business area for RBC. We participate in and are
watching these markets closely for future opportunities. For example, in collaboration
with several U.S. and Canadian banks and the UN Environment Programme Finance
Initiative, RBC commissioned a report on global best practices in environmental
financial products and services. The report was published online in August 2007, and
in September, RBC hosted a workshop for North American banks to learn more about
For more information, see the
opportunities in green financial products and services. Risk management section of the
MD&A or visit rbc.com/responsibility
and rbc.com/environment
Royal Bank of Canada: Annual Report 2007 31
Environment
2007 Highlights
• RBC contributed more than $82.8 million to community causes worldwide through donations of
more than $47.7 million and an additional $35.1 million in the sponsorship of community events
and national organizations
• Employees and pensioners worldwide contributed countless hours in volunteer activities and
funds to not for profit groups through payroll deductions, direct giving and special events
• As part of the RBC Environmental Blueprint we announced the RBC Blue Water Project™, a
$50 million philanthropic commitment over 10 years to support programs to enhance access to
clean drinking water, watershed management and water conservation
Community Donations
Donations are a cornerstone of our community programs, with a tradition of philanthropy
dating back to our roots. In fact, we have donations on record as far back as 1891.
We are one of Canada’s largest corporate donors, and contribute to communities across
North America and around the world. We are committed to making a lasting social
impact through inspired, responsible giving and by building strong partnerships with the
charitable sector. Our priority areas for funding include:
• Helping keep kids in school
• Supporting community health care through children’s mental health programs
• Providing for emerging artist programs
• Encouraging employee volunteerism
• Helping find global solutions for the preservation and conservation of and access to
fresh water.
Employee contributions
The RBC Community Blueprint™ contains
Our Employee Volunteer Grants Program was launched in 1999 to support and encourage
a broad suite of programs and initiatives
community involvement. Employees and pensioners who volunteer a minimum of
to help build stronger, more sustainable
and prosperous communities around the 40 hours a year to a registered charity are eligible for a $500 grant to the organization
world. Our employees and pensioners in their honour. Since 1999, RBC has made over 12,488 grants and donated more than
also make enormous contributions $6.24 million to celebrate our employees’ volunteer efforts.
as volunteers, sharing their financial
and business knowledge, time and Sponsorships
enthusiasm with thousands of community RBC is committed to supporting opportunities that are important to our clients and
groups worldwide.
our communities. As part of this commitment, we sponsor numerous Canadian and
international programs as well as community and cultural events in the neighbourhoods
where we do business. By leveraging our strategic partnerships, we can truly
differentiate RBC as a leading company committed to enabling the success of our
clients and our communities.
Our sponsorships focus on two major platforms: amateur sports and visual arts.
We support the development of amateur athletes through sponsorship of grassroots
events in local communities and national sport associations. We are the longest
standing supporter of Canada’s Olympic Team, dating back to 1947, and a Premier
National Partner of the 2010 Olympic and Paralympic Winter Games in Vancouver.
We also believe that healthy, vibrant communities are a direct result of investing in
creative vision and artistic talent. We proudly support community events, art exhibitions
and theatre performances. Celebrating its ninth year, the RBC Canadian Painting
Competition recognizes the talent of emerging professional visual artists in Canada.
2007 Worldwide RBC donations 2007 RBC donations
by geography in Canada by cause
(C$ millions)
For more information, visit
rbc.com/responsibility/community
Social services 22.7%
Canada $ 40.7 Arts and culture 8.8%
International $ 7.0 Civic 8.0%
Total $ 47.7 Health 28.4%
Education 32.1%
32 Royal Bank of Canada: Annual Report 2007
Community
Management’s
Discussion
and Analysis
Management’s discussion and analysis (MD&A) is provided to enable a reader to assess our results of operations and financial condition for the fiscal year ended
October 31, 2007, compared to the preceding two years. This MD&A should be read in conjunction with our Consolidated Financial Statements and related notes and
is dated November 29, 2007. All amounts are in Canadian dollars, unless otherwise specified, and are based on financial statements prepared in accordance with
Canadian generally accepted accounting principles (GAAP). Effective October 31, 2006, RBC Mortgage Company disposed of substantially all of its remaining assets
and obligations and we no longer separately classify its results in our Consolidated Financial Statements. Results reported on a total consolidated basis are compa-
rable to results reported from continuing operations for the corresponding prior periods.
Additional information about us, including our 2007 Annual Information Form, is available free of charge on our website at rbc.com/investorrelations, on the Canadian
Securities Administrators’ website at sedar.com and on the EDGAR section of the United States Securities and Exchange Commission’s (SEC) website at sec.gov.
34 Overview 51 Quarterly financial information 80 Risk management
34 About Royal Bank of Canada 51 Results and trend analysis 80 Overview
34 Vision and strategic goals 52 Fourth quarter 2007 performance 83 Credit risk
35 Selected financial and other highlights 53 Business segment results 92 Market risk
36 Overview of 2007 54 How we measure and report our 95 Operational risk
38 Outlook and objectives for 2008 business segments 96 Liquidity and funding risk
38 Accounting and control matters 55 Impact of foreign exchange rates 99 Reputation risk
38 Critical accounting policies and estimates on our business segments 99 Regulatory and legal risk
42 Future changes in accounting policies 55 Key performance and non-GAAP 100 Environmental risk
42 Controls and procedures measures 101 Insurance risk
43 Financial performance 57 Canadian Banking 101 Strategic risk
43 Overview 61 Wealth Management 102 Competitive risk
45 Total revenue 64 U.S. & International Banking 102 Systemic risk
46 Net interest income and margin 67 Capital Markets 102 Additional risks that may affect future results
47 Change in net interest income 70 Corporate Support 104 Additional financial information
47 Non-interest expense 71 Financial condition
48 Provision for credit losses 71 Balance sheet See our Glossary for definitions of terms used
48 Insurance policyholder benefits, claims 71 Capital management throughout this document
and acquisition expense 77 Off-balance sheet arrangements
49 Taxes
50 Results by geographic segment
50 Related party transactions
Caution regarding forward-looking statements
From time to time, we make written or oral forward-looking statements and related markets and lack of liquidity in various of the financial
within the meaning of certain securities laws, including the “safe markets; the impact of the movement of the Canadian dollar relative to
harbour” provisions of the United States Private Securities Litigation other currencies, particularly the U.S. dollar, British pound and Euro;
Reform Act of 1995 and any applicable Canadian securities legislation. the effects of changes in government monetary and other policies; the
We may make forward-looking statements in this document, in other effects of competition in the markets in which we operate; the impact
filings with Canadian regulators or the United States Securities and of changes in laws and regulations; judicial or regulatory judgments
Exchange Commission, in reports to shareholders and in other com- and legal proceedings; the accuracy and completeness of information
munications. Forward-looking statements include, but are not limited concerning our clients and counterparties; our ability to success-
to, statements relating to our medium-term and 2008 objectives, our fully execute our strategies and to complete and integrate strategic
strategic goals and priorities and the economic and business outlook acquisitions and joint ventures successfully; changes in accounting
for us, for each of our business segments and for the Canadian, United standards, policies and estimates, including changes in our estimates
States and international economies. Forward-looking statements are of provisions and allowances; and our ability to attract and retain key
typically identified by words such as “believe,” “expect,” “forecast,” employees and executives.
“anticipate,” “intend,” “estimate,” “plan” and “project” and similar We caution that the foregoing list of important factors is not
expressions of future or conditional verbs such as “will,” “may,” exhaustive and other factors could also adversely affect our results.
“should,” “could,” or “would.” When relying on our forward-looking statements to make decisions
By their very nature, forward-looking statements require us to with respect to us, investors and others should carefully consider the
make assumptions and are subject to inherent risks and uncertain- foregoing factors and other uncertainties and potential events. Unless
ties, which give rise to the possibility that our predictions, forecasts, required by law, we do not undertake to update any forward-looking
projections, expectations or conclusions will not prove to be accurate, statement, whether written or oral, that may be made from time to time
that our assumptions may not be correct and that our objectives, by us or on our behalf.
strategic goals and priorities will not be achieved. We caution read- Additional information about these and other factors can be
ers not to place undue reliance on these statements as a number of found under the Risk management section that may affect future
important factors could cause our actual results to differ materially results section and the Additional risks that may affect future results
from the expectations expressed in such forward-looking statements. section.
These factors include credit, market, operational, liquidity and funding
risks, and other risks discussed in our 2007 management’s discussion Information contained in or otherwise accessible through the websites
and analysis; general business and economic conditions in Canada, mentioned does not form part of this document. All references in this
the United States and other countries in which we conduct business, document to websites are inactive textual references and are for your
including the impact from the continuing volatility in the U.S. subprime information only.
Royal Bank of Canada: Annual Report 2007 33
Management’s Discussion and Analysis
Overview
About Royal Bank of Canada
Royal Bank of Canada ( RY on TSX and NYSE) and its subsidiaries oper- Caribbean. In addition, this segment includes our 50% ownership in
ate under the master brand name of RBC. We are Canada’s largest bank RBC Dexia Investor Services ( RBC Dexia IS).
as measured by assets and market capitalization and one of North Capital Markets comprises our global wholesale banking busi-
America’s leading diversified financial services companies. We provide ness, which provides a wide range of corporate and investment
personal and commercial banking, wealth management services, insur- banking, sales and trading, research and related products and services
ance, corporate and investment banking and transaction processing to corporations, public sector and institutional clients in North America,
services on a global basis. We employ more than 70,000 full- and part- and specialized products and services in select global markets.
time employees who serve more than 15 million personal, business, Our business segments are supported by our Corporate Support
public sector and institutional clients through offices in Canada, the U.S. team, which consists of Global Technology and Operations ( GTO ) and
and 36 other countries. Global Functions. GTO provides the operational and technological
Effective February 7, 2007, our previous three business segments foundation required to effectively deliver products and services to our
( RBC Canadian Personal and Business, RBC U.S. and International clients. It also leads innovative process and technology improvements
Personal and Business, and RBC Capital Markets) were reorganized intended to maintain the safety and soundness of our operations,
into four business segments: while keeping our capabilities ahead of the competition. Our Global
Canadian Banking comprises our domestic personal and busi- Functions team of professionals provides sound governance and
ness banking operations, certain retail investment businesses and our advice in the areas of risk, compliance, law, finance, tax and communi-
global insurance operations. cations. This team also manages the capital, and liquidity and funding
Wealth Management comprises businesses that directly serve positions of the enterprise to ensure that we meet regulatory require-
the growing wealth management needs of affluent and high net worth ments, while ensuring effective funding management and allocation
clients in Canada, the U.S. and outside North America, and businesses of capital. In addition, the Global Functions team provides support to
that provide asset management and trust products through RBC and our people and manages relationships with external stakeholders,
external partners. including investors, credit rating agencies and regulators, as well as
U.S. & International Banking comprises our banking businesses supports strategic business decisions.
outside Canada, including our banking operations in the U.S. and
Royal Bank of Canada
Canadian Banking Wealth Management U.S. & International Banking Capital Markets
• Personal Financial Services • Canadian Wealth Management • Banking • Global Markets
• Business Financial Services • U.S. & International Wealth • RBC Dexia IS • Global Investment Banking and
• Cards and Payment Solutions Management Equity Markets
• Global Insurance • Global Asset Management • Other
Corporate Support
• Global Technology and Operations • Global Functions
Vision and strategic goals
Our business strategies and actions are guided by our vision of maintaining our focus on meeting the needs of clients through
“Always earning the right to be our clients’ first choice.” We believe ongoing innovation and by collaborating effectively across our many
that this client-focused approach to our business is critical to achieving businesses and functions.
our strategic as well as our financial performance goals. Our Client • In Canada, our goal is to be the undisputed leader in financial
First philosophy is exhibited in all of our activities, including how services. We are strengthening the RBC brand by delivering a
we deal with our clients, develop our products and services, and superior client experience with a comprehensive suite of quality
collaborate across businesses and functions. We maintain our focus financial products and services for all our clients. In banking, we
on enhancing client satisfaction and loyalty by continually striving continue to leverage our extensive distribution capabilities to
to understand and meet the evolving needs and expectations of our grow market share across products and markets, while expanding
clients. We believe that pursuing our vision will generate strong, stable and enhancing our distribution network to meet the needs of
revenue and earnings growth that will result in top quartile total share- our clients. We are also developing innovative solutions and
holder return compared to our North American peer group. simplifying processes for our clients to make it easier for them
The Canadian market continues to provide us with significant to do business with us. In wealth management, we continue to
avenues for growth in both the retail and wholesale sectors. Our extend our lead in wealth and asset management markets and to
trusted brand, together with our broad expertise and leading posi- attract and retain experienced advisors. In capital markets, we
tions in diverse financial products and services, provides us with the continue to focus on maintaining our leadership position across
foundation and resources to expand internationally. The U.S., with its all businesses and remain our wholesale clients’ first choice for all
geographic proximity, cultural similarities and close trade relationships financial products and services.
with Canada, will continue to be a focus of future growth as we build on • In the United States, our goal is to build on our strengths in bank-
our strong market positions in selected businesses. In addition, we will ing, wealth management and capital markets. In banking, we are
continue to expand outside North America in markets where our experi- focused on meeting the needs of businesses, business owners
ence and expertise provide us with the ability to compete effectively. and professionals. We continue to expand our U.S. Southeast
For 2008, our strategic goals are to remain focused on growing footprint in key high-growth markets through targeted de novo
our domestic franchise, while continuing to expand internationally branch openings and strategic acquisitions. In wealth manage-
by leveraging our core capabilities and by building on our portfolio ment, we continue to expand our business through organic
of international businesses. We expect to achieve these goals by growth and strategic acquisitions, and provide our advisors with
34 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
customized support for investment, advisory and wealth man- improve our relationship management model to capitalize on the
agement practices by utilizing our global resources. In capital growing demand for wealth management products and services. In
markets, we continue to deepen the penetration of our existing custody services, our joint venture, RBC Dexia IS, utilizes its global
client base through diverse product offerings and leveraging the scale and expanded product capability to grow the number of and
strengths of recent acquisitions, and enhancing our origination deepen our client relationships. In capital markets, we continue to
capabilities to expand our client base. expand our global distribution and extend our capabilities in struc-
• Outside North America, our goal is to be a premier provider of turing and trading businesses, infrastructure finance and fixed
selected financial services where our core capabilities and key income origination.
expertise provide us with competitive advantages. In banking, we
intend to continue to build on our strong position in the Caribbean Guided by our Client First philosophy and strategic goals, our business
through strategic acquisitions and organic growth, supported segments continue to tailor their strategies to meet client needs and
by ongoing operational improvements, strengthening of client strengthen client relationships within their unique operating and
relationships and broadening of product offerings. In wealth competitive environments. We believe that the successful execution
management, our strategy remains focused on increasing scale of our business strategies will enhance the quality and diversity of our
through expansion in our chosen markets and recruiting relation- earnings. These efforts should result in the continued strong market
ship managers. We will continue to make targeted acquisitions leadership of our Canadian businesses as well as improved results and
and enhance the breadth of our products and services, as well as solid growth in our U.S. and international businesses.
Selected financial and other highlights Table 1
2007 vs. 2006
(C$ millions, except per share, number of and percentage amounts) 2007 2006 2005 Increase (decrease)
Total revenue $ 22,462 $ 20,637 $ 19,184 $ 1,825 8.8%
Non-interest expense 12,473 11,495 11,357 978 8.5%
Provision for credit losses 791 429 455 362 84.4%
Insurance policyholder benefits, claims and acquisition expense 2,173 2,509 2,625 (336) (13.4)%
Net income before income taxes and non-controlling interest
in subsidiaries 7,025 6,204 4,702 821 13.2%
Net income from continuing operations 5,492 4,757 3,437 735 15.5%
Net loss from discontinued operations – (29) (50) 29 n.m.
Net income $ 5,492 $ 4,728 $ 3,387 $ 764 16.2%
Segments – net income
Canadian Banking $ 2,987 $ 2,426 $ 2,007 $ 561 23.1%
Wealth Management 762 604 502 158 26.2%
U.S. & International Banking 242 261 256 (19) (7.3)%
Capital Markets 1,292 1,355 686 (63) (4.6)%
Corporate Support 209 111 (14) 98 n.m.
Net income $ 5,492 $ 4,757 $ 3,437 $ 735 15.5%
Selected information
Earnings per share (EPS) – basic $ 4.24 $ 3.65 $ 2.61 $ .59 16.2%
Earnings per share (EPS) – diluted $ 4.19 $ 3.59 $ 2.57 $ .60 16.7%
Return on common equity ( ROE) (1) 24.6% 23.5% 18.0% n.m. 110 bps
Return on risk capital ( RORC) (2) 37.4% 36.7% 29.3% n.m. 70 bps
Net interest margin (3) 1.30% 1.35% 1.53% n.m. n.m.
Capital ratios (4)
Tier 1 capital ratio 9.4% 9.6% 9.6% n.m. (20)bps
Total capital ratio 11.5% 11.9% 13.1% n.m. (40)bps
Selected balance sheet and other information
Total assets $ 600,346 $ 536,780 $ 469,521 $ 63,566 11.8%
Securities 178,255 184,869 160,495 (6,614) (3.6)%
Retail loans 169,462 151,050 140,239 18,412 12.2%
Wholesale loans 69,967 58,889 51,675 11,078 18.8%
Deposits 365,205 343,523 306,860 21,682 6.3%
Average common equity (1) 22,000 19,900 18,600 2,100 10.6%
Average risk capital (2) 14,450 12,750 11,450 1,700 13.3%
Risk-adjusted assets (4) 247,635 223,709 197,004 23,926 10.7%
Assets under management 161,500 143,100 118,800 18,400 12.9%
Assets under administration – RBC 548,200 525,800 1,778,200 22,400 4.3%
– RBC Dexia IS (5) 2,713,100 2,421,100 – 292,000 12.1%
Common share information
Shares outstanding (000s) – average basic 1,273,185 1,279,956 1,283,433 (6,771) (.5)%
– average diluted 1,289,314 1,299,785 1,304,680 (10,471) (.8)%
– end of period 1,276,260 1,280,890 1,293,502 (4,630) (.4)%
Dividends declared per share $ 1.82 $ 1.44 $ 1.18 $ .38 26.4%
Dividend yield 3.3% 3.1% 3.2% n.m. 20 bps
Common share price (RY on TSX) – close, end of period $ 56.04 $ 49.80 $ 41.67 $ 6.24 12.5%
Market capitalization (TSX) 71,522 63,788 53,894 7,734 12.1%
Business information (number of )
Employees (full-time equivalent) 65,045 60,858 60,012 4,187 6.9%
Bank branches 1,541 1,443 1,419 98 6.8%
Automated teller machines 4,419 4,232 4,277 187 4.4%
Period average US$ equivalent of C$1.00 (6) $ .915 $ .883 $ .824 $ .03 4%
Period-end US$ equivalent of C$1.00 1.059 .890 .847 .17 19%
(1) Average common equity and Return on common equity are calculated using month-end balances for the period.
(2) Average amounts are calculated using methods intended to approximate the average of the daily balances for the period. For further discussion on Average risk capital and Return on
risk capital, refer to the Key performance and non-GAAP measures section.
(3) Net interest margin (NIM) is calculated as Net interest income divided by Average assets. Average assets are calculated using methods intended to approximate the average of the daily
balances for the period.
(4) Calculated using guidelines issued by the Office of the Superintendent of Financial Institutions Canada (OSFI).
(5) Assets under administration – RBC Dexia IS represents the total Assets under administration (AUA) of the joint venture as at September 30, 2007. We have revised the 2006 amount to reflect
the amount reported by RBC Dexia IS, as we had previously disclosed only the assets under custody amount related to our joint venture.
(6) Average amounts are calculated using month-end spot rates for the period.
n.m. not meaningful
Royal Bank of Canada: Annual Report 2007 35
Management’s Discussion and Analysis
Overview of 2007
We reported record net income of $5,492 million for the year ended will create one of the most extensive retail banking networks in the
October 31, 2007, up $764 million, or 16%, from a year ago. Diluted Caribbean, with a presence in 18 countries and territories across the
earnings per share (EPS) were $4.19, up 17% compared to a year ago. region. We also announced our intention to acquire a 50% interest in
ROE was 24.6%, compared to 23.5% a year ago. The Tier 1 capital ratio Fidelity Merchant Bank & Trust Limited, the Bahamas-based wholly
of 9.4% was down 20 basis points (bps) from 9.6% a year ago, while our owned subsidiary of Fidelity Bank & Trust International Limited to
Total capital ratio of 11.5% was down 40 bps from 11.9% a year ago. form a joint venture to be called Royal Fidelity Merchant Bank & Trust
Limited, which is expected to close in the first quarter of 2008 (1) .
Executing our initiatives This pending acquisition is expected to extend our growing financial
During the year, we continued to diversify our products and services, services platform in the Caribbean and will enable us to have greater
markets, and geographical presence to generate strong and stable access to the fast-growing merchant banking and corporate advisory
earnings growth. We remained focused on strengthening our distribu- sector in the region.
tion capabilities and enhancing client satisfaction and loyalty, while
seeking to deliver top quartile total shareholder return versus our Basel II
North American peer group. As of November 1, 2007, we implemented the International
In Canada, we continued to strengthen our leadership position in Convergence of Capital Measurement and Capital Standards: A
most major product categories by enhancing the quality and breadth Revised Framework – Comprehensive Version (June 2006), known as
of our products and services, as well as expanding and upgrading Basel II. Basel II more closely aligns regulatory capital requirements
our distribution network to better serve our clients. We continued to with a financial institution’s underlying risk profile and internal risk
be the leader in the Canadian mutual fund industry in terms of net management practices as compared to Basel I, and is intended to
long-term sales and in most of our capital market businesses. We also ensure that our capital holdings adequately underpin those risks.
strengthened our leadership positions in most product categories, For details related to the implications of Basel II on our capital man-
including mortgages, credit cards and business loans and deposits. agement framework and risk measurement approaches, refer to the
As part of our initiatives to meet client needs and build enduring Capital management and Risk management sections.
client relationships, we have expanded our distribution capabilities
by adding new bank branches, insurance offices and automated teller 2007 Economic and market review
machines, particularly in high-growth markets, and have upgraded In 2007, the Canadian economy grew at an estimated rate of 2.6%,
our branches. We launched new and innovative products, including a which was down slightly from the 2.7% projected a year ago, with
high-interest online savings account and socially responsible mutual domestic demand remaining the key driver of economic growth.
funds. We have also continued to streamline sales, credit and back- Robust economic growth in the early part of the year, largely reflect-
office processes to make it easier for our clients to do business with ing strong consumer spending underpinned by strong labour market
us. Our trusted brand, together with our leadership position in most conditions, solid business investment, favourable terms of trade and
major product categories in Canada, continued to provide us with the solid housing market activities, weakened slightly in the latter part of
foundation and resources to expand internationally. the year. This was mainly attributable to slowing U.S. demand and a
In the U.S., we continued to build scale and capability in all our tightening of credit conditions as a result of the U.S. subprime mort-
major businesses through a combination of organic growth and stra- gage market concerns. While growth of both consumer and business
tegic acquisitions. To expand our banking capabilities strategically in lending largely remained solid, credit quality weakened moderately
high-growth markets in the U.S. Southeast, we completed the acquisi- during the year as conditions appeared to be reverting to historical
tion of Atlanta-based Flag Financial Corporation and 39 AmSouth Bank averages. The Bank of Canada raised the overnight rate by 25 bps in
branches in Alabama. These acquisitions, which complemented our July to 4.5%, and kept the rate unchanged in September and October
de novo branch openings, have significantly expanded our banking taking into account the tightening of credit conditions arising from the
presence in the U.S. Southeast. We also announced an agreement (1) to U.S. subprime mortgage market concerns and the marked appreciation
acquire Alabama National BanCorporation, the parent of 10 subsidiary of the Canadian dollar, which had a negative impact on net exports. To
banks and other affiliated businesses in Alabama, Florida and Georgia, address the liquidity concerns and to support the efficient functioning
which will add another 103 branches and strengthen our retail dis- of the Canadian financial system, the Bank of Canada injected liquidity
tribution by growing our footprint to over 450 locations throughout into the financial markets on a number of occasions over the latter part
high-growth southeastern U.S. markets. We also expanded our invest- of the year.
ment banking and wealth management capabilities in the U.S. The U.S. economy grew at an estimated rate of 2% for the year,
We completed the acquisition of Carlin Financial Group, which provides down from the 2.6% projected in 2006. This downward revision to
our clients with a best-in-class North American electronic trade execu- growth was primarily attributable to the U.S. subprime mortgage
tion platform. We completed the acquisition of Daniels & Associates, market concerns. Solid economic growth in the middle of the year, pri-
L.P., a leading mergers and acquisitions advisory firm specializing marily supported by continued non-residential investment, strong
in the communications, media and entertainment, and technology export growth and still-solid consumer spending, slowed in the latter
sectors. In addition, we completed the acquisition of Seasongood & part of the year. The weakened economic growth was largely a result
Mayer, LLC, strengthening our franchise as one of the leading munici- of slowing residential investment amid the ongoing housing market
pal finance platforms in the U.S. We also completed the acquisition correction, a tightening of credit conditions and increased funding
of J.B. Hanauer & Co., expanding our retail fixed income and wealth costs arising from the U.S. subprime mortgage market concerns, as
management capabilities in New Jersey, Florida and Pennsylvania. well as a general repricing of risk in numerous markets. Consumer and
Internationally, we strategically expanded our distribution net- business lending, excluding mortgages, accelerated over recent
work, products and services in fast-growing markets and regions. months, although there remain concerns that the intensification of the
During the year, we announced our intention to acquire RBTT Financial housing market correction would eventually dampen lending. Credit
Group (RBTT) to expand our banking footprint in the Caribbean. quality weakened, particularly in high-risk credit products and resi-
The acquisition is expected to close by the middle of 2008 (1) , and dential real estate-related loans. To alleviate the mounting liquidity
(1) These acquisitions are subject to customary closing conditions including regulatory and shareholder approvals.
36 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
concerns and to ease the U.S. financial market volatility arising from Our three-year average annual TSR (2) of 25% ranks us in the top
the U.S. subprime mortgage market difficulties, the U.S. Federal quartile compared to our peer group and compares favourably with
Reserve injected a significant amount of liquidity into financial the three-year average annual TSR for our peer group of 8%. Our per-
markets beginning in August. It then lowered its federal funds rate by formance reflects our strong financial results, including returns on our
50 bps and 25 bps in September and October, respectively, to 4.5%, investment in our businesses, and effective risk and capital manage-
in an effort to promote economic growth, forestall a severe economic ment, which has allowed us to successfully meet most of our annual
downturn and alleviate liquidity concerns. earnings and capital objectives over the last three years.
Growth in other global economies remained solid for the year. Our five-year average annual TSR (2) of 19% ranks us in the sec-
Although central banks in the United Kingdom, the Eurozone and ond quartile against our peer group. This compares favourably with
Japan had indicated their intention to further increase interest rates the five-year average annual TSR for our peer group of 14%.
to contain inflationary pressures in the early part of the year, they had Dividends paid over the three-year period have increased at an
put their tightening monetary policies on hold to avoid an economic average annual compounded rate of 22%.
slowdown, taking into account the financial market volatility triggered
(1) Versus the TSR of seven large Canadian financial institutions (Manulife Financial
by U.S. subprime mortgage market concerns.
Corporation, The Bank of Nova Scotia, Toronto-Dominion Bank, Bank of Montreal,
Compared to our favourable outlook in 2006, global capital mar- Sun Life Financial Inc., Canadian Imperial Bank of Commerce and National Bank of
ket conditions were mixed during the year, largely attributable to the Canada) and 13 U.S. financial institutions (Bank of America Corporation, JPMorgan
Chase & Co., Wells Fargo & Company, Wachovia Corporation, U.S. Bancorp, SunTrust
U.S. subprime mortgage market concerns. Most major equity markets Banks, Inc., The Bank of New York Mellon Corporation, BB&T Corporation, Fifth Third
reached record highs in June and July, and then declined as did the Bancorp, National City Corporation, The PNC Financial Services Group, Inc., KeyCorp
and Northern Trust Corporation).
debt markets, except for government bonds, largely due to the spillover (2) The three-year average annual TSR is calculated based on share price appreciation
effects of the U.S. subprime mortgage market difficulties. Debt and plus reinvested dividend income for the period October 31, 2004 to October 31, 2007.
The five-year average annual TSR is calculated based on the period October 31, 2002
equity origination activities, which were strong at the beginning of the to October 31, 2007.
year, slowed due to less favourable pricing and a tightening of liquidity.
Merger and acquisitions (M&A) activity remained strong for most of
the year. Three-year average annual total shareholder return (home currency) (1)
2007 Performance vs. objectives Table 2 30% RBC
2007 2007 24% Canadian peer group
Objectives Performance
18% Total peer group
Diluted earnings per share (EPS) growth 10%+ 17% U.S. peer group
Defined operating leverage (1) >3% 2.6% 12%
Return on common equity (ROE) 20%+ 24.6% 6%
Tier 1 capital ratio (2) 8%+ 9.4% 0%
Dividend payout ratio 40% –50% 43%
(1) Our defined operating leverage refers to the difference between our revenue growth
rate (as adjusted) and non-interest expense growth rate (as adjusted). Revenue
is based on a taxable equivalent basis and excludes consolidated Variable interest
entities (VIEs), accounting adjustments related to the new financial instruments Five-year average annual total shareholder return (home currency) (1)
accounting standards and Global Insurance revenue. Non-interest expense excludes
Global Insurance expense. This is a non-GAAP measure. For further information includ-
ing a reconciliation, refer to the Key performance and non-GAAP measures section.
(2) Calculated using guidelines issued by the OSFI. 30% RBC
24% Canadian peer group
2007 Annual objectives
18% Total peer group
Our diluted EPS growth, ROE and dividend payout ratio compared
12% U.S. peer group
favourably to our annual objectives, largely reflecting strong perfor-
mance across most of our businesses. We also increased our dividend 6%
by $.38, or 26%, in 2007. Our defined operating leverage ratio was 0%
below our annual objective, reflecting higher costs in support of our
growing business as well as investment in future growth initiatives
including acquisitions. Our capital position remained strong, with a
(1) For Canadian financial institutions, the Canadian dollar is used. For U.S. financial
Tier 1 capital ratio comfortably above our target.
institutions, the U.S. dollar is used.
Medium-term objective
Our medium-term objective is to achieve top quartile (1) total share-
holder return (TSR) compared to our Canadian and U.S. peers.
This medium-term objective increases our focus on our priority to
maximize shareholder value and requires us to consider both our
current performance and our investment in higher return businesses
that will provide sustainable competitive advantage and stable
earnings growth.
Royal Bank of Canada: Annual Report 2007 37
Management’s Discussion and Analysis
Outlook and objectives for 2008
Economic outlook of the mortgage insurance market should also continue to underpin
Economic growth in Canada is expected to weaken as a strong credit growth. We anticipate business lending to remain solid with
Canadian dollar and sluggish U.S. growth weigh on export growth. ongoing investment spending. While credit quality is projected to
Nonetheless, continued favourable terms of trade should support weaken moderately, we expect consumer and business credit quality
income growth, which in turn should help sustain business and con- to remain solid in a historical context, with an anticipated increase in
sumer spending. We expect the Bank of Canada to decrease interest provision for credit losses primarily resulting from modestly higher
rates by 50 bps by early 2008, taking into account the intensifying average delinquency rates, portfolio growth and lower recoveries.
restraint from the trade sector before shifting to a rising interest rate Capital market conditions are anticipated to improve from the
environment in late 2008 when financial market volatility is expected challenging environment over the latter part of 2007 stemming from
to dissipate. We forecast that the Canadian dollar will remain elevated the U.S. subprime mortgage market concerns. Liquidity concerns
against the U.S. dollar into early 2008, reflecting firm commodity should also abate as global financial markets stabilize and gradually
prices, solid global economic growth and broad-based U.S. dollar return to more normalized levels of activity. We expect a rebound in
weakness. Taking into account modest U.S. growth, a strong Canadian underperforming businesses as strains in financial markets ease.
dollar and a tightening of credit conditions, we expect the Canadian
economy to grow at 2.2% in 2008. 2008 Objectives
We anticipate that the U.S. financial market volatility will persist Our primary financial objective continues to focus on providing top
into early 2008 as investors and lenders will remain cautious and quartile TSR relative to our North American peers. This medium-term
risk averse amid a slowdown in the housing market. U.S. economic objective requires our focus on both current performance as well
growth is expected to accelerate in the latter part of 2008, primarily as prudent investment in higher return businesses that will provide
underpinned by rising business investment, strong export growth us with competitive advantages and stable earnings growth for
boosted by the relatively weak U.S. dollar, as well as continued con- the future.
sumer spending reflecting solid personal disposable income and
healthy household balance sheets against a backdrop of lower interest
2008 Objectives Table 3
rates, and the abatement of current financial market volatility and the
housing market correction. We project that the U.S. Federal Reserve Diluted earnings per share (EPS) growth 7% –10%
will decrease the federal funds rate a further 75 bps by early 2008 to Defined operating leverage (1) >3%
insure that the downside risks from the financial market turmoil are Return on common equity (ROE) 20%+
contained, and will start to increase the rate in the latter part of 2008 Tier 1 capital ratio (2) 8%+
when economic growth is expected to accelerate. We project that the Dividend payout ratio 40% –50%
U.S. economy will grow at 2.2% in 2008, taking into account antici- (1) Our defined operating leverage is a non-GAAP measure and refers to the difference
between our revenue growth rate (as adjusted) and non-interest expense growth rate
pated improving economic conditions in the latter part of the year. (as adjusted).
Growth in other global economies is expected to ease moderately (2) Calculated using guidelines issued by the OSFI under Basel II, which changes the
methodology for the determination of risk-adjusted assets (RAA) and regulatory capital.
in 2008, with the highest growth projected for China and other emerg-
ing Asian economies. Economic growth in Japan and the Eurozone
is anticipated to weaken slightly on moderately slowing investment For 2008, our financial objectives have been established taking into
related to tighter credit conditions and modest U.S. growth, although it consideration our three strategic goals and our economic and business
should remain solidly supported by continued business and household outlooks as outlined in this section. Objectives for our defined operat-
spending. ing leverage, ROE, Tier 1 capital ratio and dividend payout ratio remain
unchanged, reflecting our continued commitment to strong revenue
Business outlook growth and cost containment, as well as sound and effective manage-
Although consumer lending growth is expected to moderate in 2008 ment of capital resources. Our 2008 diluted EPS growth objective is
on tighter credit conditions, growth should continue to be supported 7% to 10 %. Our objectives factor in the effect of our pending acquisi-
by rising domestic demand amid expanding labour markets. The intro- tions of ANB and RBTT, which will be funded partly through issuance of
duction of new mortgage products in Canada due to the liberalization our common shares, as well as the related integration costs.
Accounting and control matters
Critical accounting policies and estimates
Application of critical accounting policies and estimates Our critical accounting policies and estimates have been reviewed and
Our significant accounting policies and estimates are described in approved by our Audit Committee, in consultation with management,
Note 1 to our Consolidated Financial Statements. Certain of these as part of their review and approval of our significant accounting
policies, as well as estimates made by management in applying such policies and estimates.
policies, are recognized as critical because they require us to make
particularly subjective or complex judgments about matters that are Allowance for credit losses
inherently uncertain and because of the likelihood that significantly The allowance for credit losses represents management’s estimate of
different amounts could be reported under different conditions or identified credit related losses in the portfolio, as well as losses that
using different assumptions. Our critical accounting policies and esti- have been incurred but are not yet identifiable at the balance sheet
mates relate to the allowance for credit losses, fair value of financial date. The allowance is established to cover the lending portfolio includ-
instruments, other-than-temporary impairment of available-for-sale ing loans, acceptances, letters of credit and guarantees, and unfunded
and held-to-maturity securities, securitization, variable interest enti- commitments. The allowance for credit losses comprises the specific
ties, pensions and other post-employment benefits and income taxes. allowance and the general allowance. The specific allowance is
38 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
determined through management’s identification and determination of For heterogeneous loans (wholesale loans including small busi-
losses related to impaired loans. The general allowance is determined ness loans managed individually), the general allowance is based on
on a quarterly basis through management’s assessment of probable the application of estimated probability of default, gross exposure
losses in the remaining portfolio. at default and loss factors, which are determined by historical loss
The process for determining the allowances involves quantitative experience and delineated by loan type and rating. These parameters
and qualitative assessments using current and historical credit are based on historical loss rates (default migration, loss severity
information. Our lending portfolio is reviewed on an ongoing basis to and exposure at default), supplemented by industry studies and are
assess whether any borrowers should be classified as impaired and updated on a regular basis. This approach allows us to generate a
whether an allowance or write-off is required. The process inherently range of potential losses over an economic cycle. One of the key judg-
requires the use of certain assumptions and judgments including: mental factors that influence the loss estimate for this portfolio is the
(i) assessing the impaired status and risk ratings of loans; (ii) estimat- application of the internal risk rating framework, which relies on our
ing cash flows and collateral values; (iii) developing default and loss quantitative and qualitative assessments of a borrower’s financial con-
rates based on historical and industry data; (iv) adjusting loss rates dition in order to assign an internal credit risk rating similar to those
and risk parameters based on the relevance of historical loss rate used by external rating agencies. Any material change in the above
given changes in credit strategies, processes and policies; (v) assess- parameters or assumptions would affect the range of probable credit
ing the current credit quality of the portfolio based on credit quality losses and consequently may affect the general allowance level.
trends in relation to impairments, write-offs and recoveries, portfolio For homogeneous portfolios (retail loans) including residential
characteristics and composition; and (vi) determining the current posi- mortgages, credit cards, as well as personal and small business loans
tion in the economic and credit cycles. Changes in these assumptions that are managed on a pooled basis, the determination of the general
or using other reasonable judgments can materially affect the allow- allowance is based on the application of historical loss rates. Historical
ance level and thereby our net income. loss rates are applied to current outstanding loans to determine a
range of probable losses over an economic cycle.
Specific allowances In determining the general allowance level, management also
Specific allowances are established to cover estimated losses on both considers the current portfolio credit quality trends, business and
retail and wholesale impaired loans. Loan impairment is recognized economic conditions, the impact of policy and process changes, and
when, based on management’s judgment, there is no longer reason- other supporting factors. In addition, the general allowance includes
able assurance that all interest and principal payments will be made in a component for the model limitations and imprecision inherent in the
accordance with the loan agreement. allowance methodologies.
For wholesale portfolios including small business loans managed Any fundamental change in methodology is subject to indepen-
individually, which are continuously monitored, an account is classified dent vetting and review.
as impaired based on our evaluation of the borrower’s overall financial
condition, its available resources and its propensity to pay amounts as Total allowance for credit losses
they come due. A specific allowance is then established on individual Based on the procedures discussed above, management believes
accounts that are classified as impaired, using management’s that the total allowance for credit losses of $1,572 million is adequate
judgment relating to the timing of future cash flow amounts that can to absorb estimated credit losses incurred in the lending portfolio as
be reasonably expected from the borrower, financially responsible at October 31, 2007. This amount includes $79 million classified in
guarantors and the realization of collateral. The amounts expected other liabilities, which relates to letters of credit and guarantees and
to be recovered are reduced by estimated collection costs and dis- unfunded commitments. The year-over-year increase of $86 million
counted at the effective interest rate of the obligation. largely reflects the increase in impaired loans.
For retail portfolios managed on a pooled basis, including resi-
dential mortgages and personal and small business loans, accounts Fair value of financial instruments
are classified as impaired based on contractual delinquency status, With the adoption of the three new accounting standards related to
generally 90 days past due. The estimation of specific allowance on financial instruments on November 1, 2006, a greater portion of our
these accounts is based on formulas that apply product-specific net Consolidated Balance Sheet is now measured at fair value. Refer to
write-off ratios to the related impaired amounts. The net write-off ratios Note 1 to our Consolidated Financial Statements for a detailed discus-
are based on historical loss rates, adjusted to reflect management’s sion. Under the new standards, all financial instruments are required
judgment relating to recent credit quality trends, portfolio character- to be measured at fair value on initial recognition except for certain
istics and composition, and economic and business conditions. Credit related party transactions. Measurement in subsequent periods
card balances are directly written off after payments are 180 days past depends on whether the financial instruments have been classified or
due. Personal loans are generally written off at 150 days past due. designated as held-for-trading, available-for-sale, held-to-maturity,
loans and receivables or other financial liabilities.
General allowance Financial assets and financial liabilities held-for-trading, including
The general allowance is established to cover estimated credit losses derivative instruments, are measured at fair value with changes in the
that are incurred in the lending portfolio that have not yet been specifi- fair values recognized in net income, except for derivatives designated
cally identified as impaired. This estimation is based on a number in effective cash flow hedges or hedges of foreign currency exposure
of assumptions including: (i) the level of unidentified problem loans of a net investment in a self-sustaining foreign operation; the changes
given current economic and business conditions; (ii) the timing of in the fair values of those derivatives are recognized in Other com-
the realization of impairment; (iii) the gross exposure of a credit prehensive income ( OCI ). Available-for-sale financial assets are also
facility at the time of default; and (iv) the ultimate severity of loss. In measured at fair value with unrealized gains and losses, including
determining the appropriate level of general allowance, management changes in foreign exchange rates, being recognized in OCI except for
first employs statistical models using historical loss rates and risk investments in equity instruments classified as available-for-sale that
parameters to estimate a range of probable losses over an economic do not have a quoted market price in an active market, which are mea-
cycle. Management then considers changes in the credit granting sured at cost. Financial assets held-to-maturity, loans and receivables,
process including underwriting, limit setting and the workout process and other financial liabilities are measured at amortized cost using the
in order to adjust historical experience to better reflect the current effective interest method.
environment. In addition, current credit information including portfolio At October 31, 2007, approximately $276 billion, or 46%, of our
composition, credit quality trends and economic and business infor- financial assets and $205 billion, or 36%, of our financial liabilities
mation is assessed to determine the appropriate allowance level. were carried at fair value ($184 billion, or 34%, of financial assets and
Royal Bank of Canada: Annual Report 2007 39
Management’s Discussion and Analysis
$80 billion, or 16%, of financial liabilities at October 31, 2006). Note 2 interest rate yield curves, currency rates and price and rate volatilities
to our Consolidated Financial Statements provides disclosure of the as applicable. However, certain derivative financial instruments are
fair value of our financial instruments as at October 31, 2007. valued using significant unobservable market inputs such as default
Fair value is defined as the amount at which a financial instru- correlations, among others. These inputs are subject to significantly
ment could be bought or sold in a current transaction, other than in a more quantitative analysis and management judgment. Where input
forced or liquidation sale, between knowledgeable and willing parties parameters are not based on market observable data, we defer the
in an arm’s-length transaction under no compulsion to act. The best initial trading profit until the amounts deferred become realized
evidence of fair value is quoted bid or ask price, as appropriate, in an through the receipt and/or payment of cash or once the input
active market. Where bid and ask prices are unavailable, we use the parameters are observable in the market. We also record fair value
closing price of the most recent transaction of that instrument subject adjustments to account for measurement uncertainty due to model
to the liquidity adjustments referred to below. Where quoted prices risk and parameter uncertainty when valuing complex or less actively
are not available for a particular financial instrument, we use the traded financial instruments. For further information on our derivative
quoted price of a financial instrument with similar characteristics and instruments, refer to Note 7 to our Consolidated Financial Statements.
risk profiles or internal or external valuation models using observable The following table summarizes our significant financial assets
market-based inputs to estimate the fair value. and liabilities carried at fair value, by valuation methodology at
The determination of fair value for actively traded financial instru- October 31, 2007 and October 31, 2006. We have applied the general
ments that have quoted market prices or readily observable model concepts contained in the accounting standards related to financial
input parameters requires minimal subjectivity. Management’s judg- instruments under Canadian GAAP to determine the classification of
ment is required, however, when the observable market prices and assets and liabilities carried at fair value among the valuation method-
parameters do not exist. In addition, management exercises judgment ology groupings below.
when establishing market valuation adjustments for liquidity when Instruments grouped within “quoted prices” include those where
we believe that the amount realized on sale may be less than the prices are obtained from an exchange, dealer, broker, industry group,
estimated fair value due to insufficient liquidity over a short period of pricing service or regulatory agency, or net asset values provided by
time. This includes adjustments calculated when market prices are not fund managers of mutual funds and hedge funds. Instruments priced
observable due to insufficient trading volume or a lack of recent trades based on models are grouped based on whether the models include
in a less active or inactive market. In addition, liquidity adjustments significant observable or unobservable parameters. Where fair value is
are calculated to reflect the cost of unwinding a larger than normal not evidenced by observable market parameters, and day one
market risk position. unrealized gains and losses are not permitted under Canadian GAAP,
The majority of our financial instruments classified as held- the instrument is grouped as being based on “pricing models with
for-trading other than derivatives and financial assets classified as significant unobservable market parameters.”
available-for-sale comprise or relate to actively traded debt and equity In September 2006, the U.S. Financial Accounting Standards
securities, which are carried at fair value based on available quoted Board (FASB) issued FAS 157, Fair Value Measurements, which
prices. As few derivatives and financial instruments designated as includes measurement guidance and requires that all financial instru-
held-for-trading are actively quoted, we rely primarily on internally ments measured at fair value be categorized in fair value hierarchy
developed pricing models and established industry standard pricing levels. We have not adopted these measurement and disclosure
models, such as Black-Schöles, to determine fair value. In determining requirements for U.S. GAAP reconciliation disclosure purposes, and
the assumptions to be used in our pricing models, we look primarily the information contained in the table below is not intended to corre-
to external readily observable market inputs including factors such as spond to those levels.
Assets and liabilities carried at fair value by valuation methodology Table 4
2007 2006 (1)
Based on Based on
Pricing Pricing Pricing Pricing
models with models with models with models with
significant significant significant significant
observable unobservable observable unobservable
(C$ millions, Quoted market market Quoted market market
except percentage amounts) Fair value prices parameters parameters Total Fair value prices parameters parameters Total
Financial assets
Required to be classified as held-for-trading
other than derivatives (2) $ 129,408 82% 18% – 100% $ 147,237 87% 13% $ – 100%
Derivatives (3) 65,568 – 100% – 100% 37,008 – 100% – 100%
Designated as held-for-trading (2) 52,580 36% 64% – 100% n.a. n.a. n.a. n.a. n.a.
Classified as available-for-sale 28,811 70% 28% 2% 100% n.a. n.a. n.a. n.a. n.a.
$ 276,367 $ 184,245
Financial liabilities
Required to be classified as held-for-trading
other than derivatives (2) $ 46,328 89% 11% – 100% $ 38,252 97% 3% $ – 100%
Derivatives (4) 71,422 – 99% 1% 100% 41,728 – 100% – 100%
Designated as held-for-trading (2) 87,433 – 100% – 100% n.a. n.a. n.a. n.a. n.a.
$ 205,183 $ 79,980
(1) Prior to the adoption of the new accounting standards related to financial instruments on November 1, 2006, there were no financial assets or financial liabilities designated as held-for-
trading and there were no financial assets classified as available-for-sale. Consequently, prior period comparatives are not applicable (n.a.).
(2) The categories of financial instruments are explained in Note 1 to our Consolidated Financial Statements.
(3) The fair value excludes margin requirements of $1,017 million (2006 – $721 million).
(4) The fair value excludes market and credit valuation adjustments of $588 million (2006 – $366 million).
40 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
2007 vs. 2006 are not available, the valuation of retained interests in sold assets is
With the adoption of the new financial instruments accounting stan- based on our best estimate of several key assumptions such as the
dards, there are new categories of financial instruments carried at payment rate of the transferred loans, weighted average life of the
fair value such as financial assets and financial liabilities designated prepayable receivables, excess spread, expected credit losses and
as held-for-trading and financial assets classified as available-for- discount rate. The fair value of such retained interests calculated using
sale which were carried at amortized cost prior to November 1, 2006. these assumptions affects the gain or loss that is recognized from
Further, all derivatives are now carried at fair value whereas prior to the sale of the loans. Refer to Note 5 to our Consolidated Financial
that date, only derivatives other than designated hedging instruments Statements for the volume of securitization activities of our loans, the
were carried at fair value. Accordingly, the comparative amounts for gain or loss recognized on sale and a sensitivity analysis of the key
2006 in the above table do not include these financial instruments. assumptions used in valuing our retained interests.
The decrease of $18 billion in financial assets classified as Another key accounting determination is whether the SPE that
held-for-trading and the increase of $8 billion in financial liabilities is used to securitize and sell our loans is required to be consolidated.
classified as held-for-trading in 2007 are primarily due to our equity As described in Note 6 to our Consolidated Financial Statements, we
and bond securities held related to our proprietary equity arbitrage concluded that none of the SPEs used to securitize our financial assets
and fixed income trading businesses, where we offset the risks from should be consolidated.
our securities holdings by short selling other securities that are of
similar risks to those in our portfolios. The increase of $29 billion in Variable interest entities
derivative assets and of $30 billion in derivative liabilities in 2007, Canadian Institute of Chartered Accountants ( CICA ) Accounting
primarily in foreign exchange and interest rate contracts, are largely Guideline 15, Consolidation of Variable Interest Entities (AcG-15), pro-
due to increased volatility, strong shifts in exchange rates and inter- vides guidance on applying the principles of consolidation to certain
est rates, and higher client and trading activity, partially offset by the entities defined as variable interest entities (VIEs). Where an entity is
weakening of the U.S. dollar relative to the Canadian dollar. These considered a VIE, the Primary Beneficiary is required to consolidate
activities are consistent with our strategy for these businesses and the the assets, liabilities and results of operations of the VIE. The Primary
increases in 2007 are within the approved risk limits. Beneficiary is the entity that is exposed, through variable interests,
The determination of fair value where quoted prices are not to a majority of the VIE’s expected losses (as defined in AcG-15) or is
available, and the identification of appropriate valuation adjustments entitled to a majority of the VIE’s expected residual returns (as defined
require management judgment and are based on quantitative research in AcG-15), or both.
and analysis. Our risk management group is responsible for estab- We use a variety of complex estimation processes involving both
lishing our valuation methodologies and policies, which address the qualitative and quantitative factors to determine whether an entity is a
use and calculation of valuation adjustments. These methodologies VIE , and, if required, to analyze and calculate the expected losses and
are reviewed on an ongoing basis to ensure that they remain appro- the expected residual returns. These processes involve estimating the
priate. Risk management’s oversight in the valuation process also future cash flows and performance of the VIE, analyzing the variability
includes ensuring all significant financial valuation models are strictly in those cash flows, and allocating the losses and returns among the
controlled and regularly recalibrated and vetted to provide an inde- identified parties holding variable interests to determine who is the
pendent perspective. During the year, there was no significant change Primary Beneficiary. In addition, there is a significant amount of judg-
to our methodologies for determining fair value, including those for ment exercised in interpreting the provisions of AcG-15 and applying
establishing any valuation adjustments. Refer to the Risk management them to our specific transactions.
section for further detail on the sensitivity of financial instruments AcG-15 applies to a variety of our businesses, including our
used in trading and non-trading activities. involvement with multi-seller conduits we administer, credit invest-
ment products and structured finance transactions. For further details
Other-than-temporary impairment of available-for-sale and on our involvement with VIEs, refer to the Off-balance sheet arrange-
held-to-maturity securities ments section and Note 6 to our Consolidated Financial Statements.
Available-for-sale and held-to-maturity securities are assessed for
impairment at each reporting date. When the fair value of any security Pensions and other post-employment benefits
has declined below its amortized cost, management is required to We sponsor a number of defined benefit and defined contribution
assess whether the decline is other-than-temporary. In making this plans providing pension and other benefits to eligible employees after
assessment, we consider such factors as the type of investment, the retirement. These plans include registered pension plans, supple-
length of time and extent to which the fair value has been below the mental pension plans and health, dental, disability and life insurance
amortized cost, the financial and credit aspects of the issuer, and our plans. The pension plans provide benefits based on years of service,
intent and ability to hold the investment long enough to allow for any contributions and average earnings at retirement.
anticipated recovery. The decision to record a writedown, its amount Due to the long-term nature of these plans, the calculation of ben-
and the period in which it is recorded could change if management’s efit expenses and obligations depends on various assumptions such
assessment of one or more of those factors is different. If the decline as discount rates, expected rates of return on assets, health care cost
in value is considered to be other-than-temporary, the cumulative trend rates, projected salary increases, retirement age, mortality and
changes in the fair values of available-for-sale securities previously termination rates. The discount rate assumption is determined using a
recognized in Accumulated other comprehensive income (AOCI) are yield curve of AA corporate debt securities. All other assumptions are
reclassified to net income during that period. For further details, refer determined by management and are reviewed annually by the actuar-
to Notes 1 and 3 to our Consolidated Financial Statements. ies. Actual experience that differs from the actuarial assumptions will
affect the amounts of benefit obligation and expense. The weighted
Securitization average assumptions used and the sensitivity of key assumptions are
We periodically securitize Canadian residential mortgages, credit card presented in Note 20 to our Consolidated Financial Statements.
receivables and commercial mortgage loans by selling them to special
purpose entities ( SPEs) or trusts that issue securities to investors. Income taxes
Some of the key accounting determinations in a securitization of our Management exercises judgment in estimating the provision for
loans are whether the transfer of the loans meets the criteria required income taxes. We are subject to income tax laws in various jurisdictions
to be treated as a sale and, if so, the valuation of our retained interests where we operate. These complex tax laws are potentially subject
in the securitized loans. Refer to Note 1 to our Consolidated Financial to different interpretations by the taxpayer and the relevant tax
Statements for a detailed description of the accounting policy for authority. The provision for income taxes represents management’s
loan securitization. interpretation of the relevant tax laws and its estimate of current and
When we securitize loans and retain an interest in the securitized future income tax implications of the transactions and events during
loans, it is a matter of judgment whether the loans have been legally the period. A future income tax asset or liability is determined for each
isolated. We obtain legal opinions where required to give us comfort temporary difference based on the future tax rates that are expected
that legal isolation of the transferred loans has been achieved. We to be in effect and management’s assumptions regarding the expected
often retain interests in securitized loans such as interest-only strips, timing of the reversal of such temporary differences.
servicing rights or cash reserve accounts. Where quoted market prices
Royal Bank of Canada: Annual Report 2007 41
Management’s Discussion and Analysis
Future changes in accounting policies
Future changes in accounting policies and disclosure Settlement in FASB Interpretation No. 48 (FSP FIN 48-1), on May 2,
Canadian GAAP 2007. FIN 48 and FSP FIN 48-1 provide additional guidance on how to
Capital Disclosures and Financial Instruments – Disclosures recognize, measure and disclose income tax benefits. FIN 48 became
and Presentation effective for us on November 1, 2007, and we do not expect it will have
On December 1, 2006, CICA issued three new accounting standards: a material impact on our consolidated financial position and results
Handbook Section 1535, Capital Disclosures (Section 1535), Handbook of operations.
Section 3862, Financial Instruments – Disclosures (Section 3862),
and Handbook Section 3863, Financial Instruments – Presentation Framework on fair value measurement
(Section 3863). These new standards became effective for us on On September 15, 2006, FASB issued FASB Statement No. 157, Fair
November 1, 2007. Value Measurements ( FAS 157), which establishes a framework for
Section 1535 requires the disclosure of (i) an entity’s objectives, measuring fair value in U.S. GAAP and is applicable to other account-
policies and processes for managing capital; (ii) quantitative data ing pronouncements where fair value is considered to be the relevant
about what the entity regards as capital; (iii) whether the entity has measurement attribute. FAS 157 also expands disclosures about fair
complied with any capital requirements; and (iv) if it has not complied, value measurements and will be effective for us on November 1, 2008.
the consequences of such non-compliance. We are currently assessing the impact of adopting this standard on our
Sections 3862 and 3863 replace Handbook Section 3861, consolidated financial position and results of operations.
Financial Instruments – Disclosure and Presentation, revising and
enhancing its disclosure requirements, and carrying its presentation Fair value option for financial assets and liabilities
requirements forward unchanged. These new sections place increased On February 15, 2007, FASB issued Statement No. 159, The Fair Value
emphasis on disclosures about the nature and extent of risks arising Option for Financial Assets and Liabilities ( FAS 159). FAS 159 provides
from financial instruments and how the entity manages those risks. an entity the option to report selected financial assets and liabilities
at fair value and establishes new disclosure requirements for assets
U.S. GAAP and liabilities to which the fair value option is applied. FAS 159 will be
Guidance on accounting for income taxes effective for us on November 1, 2008. We are currently assessing the
FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in impact of adopting this standard on our consolidated financial position
Income Taxes – an Interpretation of FASB Statement No. 109 (FIN 48), and results of operations.
on July 13, 2006, and its related Staff Position FIN 48-1, Definition of
Controls and procedures
Disclosure controls and procedures Internal control over financial reporting
Our disclosure controls and procedures are designed to provide Management is responsible for establishing and maintaining adequate
reasonable assurance that information required to be disclosed by internal control over financial reporting to provide reasonable assur-
us is recorded, processed, summarized and reported within the time ance regarding the reliability of financial reporting and the preparation
periods specified under Canadian and U.S. securities laws and include of financial statements for external purposes in accordance with GAAP.
controls and procedures that are designed to ensure that informa- Management assessed the effectiveness of our internal control over
tion is accumulated and communicated to management, including the financial reporting as of October 31, 2007, and based on that assess-
President and Chief Executive Officer, and Chief Financial Officer, to ment, concluded that our internal control over financial reporting was
allow timely decisions regarding required disclosure. effective. See page 112 for Management’s report on internal control
Management evaluated, under the supervision of and with the over financial reporting and the Report of Independent Registered
participation of the President and CEO, and Chief Financial Officer, the Chartered Accountants. No changes were made in our internal control
effectiveness of our disclosure controls and procedures as defined over financial reporting during the year ended October 31, 2007, that
under Multilateral Instrument 52-109 and the U.S. Securities Exchange have materially affected, or are reasonably likely to materially affect,
Act of 1934 as of October 31, 2007. Based on that evaluation, the our internal control over financial reporting.
President and Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective
as of October 31, 2007.
42 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Financial performance
Overview
2007 vs. 2006 As at October 31, 2007, Capital Markets had $216 million of net
We reported record net income of $5,492 million for the year ended exposure to U.S. subprime CDOs of ABS, after taking into consideration
October 31, 2007, up $764 million, or 16%, from a year ago. Diluted protection provided by credit default swaps. We have credit default
EPS were $4.19, up 17% compared to a year ago. ROE was 24.6%, swaps providing protection of $240 million, recorded at fair market
compared to 23.5% a year ago. Our strong results were largely attrib- value of $104 million, with counterparties rated less than AAA by
utable to profitable volume and balance growth in our banking and Standard & Poor’s (S&P) and less than Aaa by Moody’s Investors
wealth management businesses, strong Global Insurance results, Service (Moody’s). Other credit default swaps provide an additional
and increased equity and foreign exchange trading results and strong $1,053 million of protection against our gross exposure and are either
equity origination activity in our capital markets businesses. These collateralized or with counterparties rated AAA by S&P and Aaa
results reflected the ongoing successful execution of our growth initia- by Moody’s.
tives as well as generally favourable economic and market conditions As at October 31, 2007, we had $388 million of exposure to
for most of the year. For additional discussion on the performance of U.S. subprime RMBS recorded as available-for-sale, which we intend
our business segments, refer to the Business segment results section to hold until maturity. As at October 31, 2007, Capital Markets had
starting on page 57. A gain related to the Visa Inc. restructuring and the no net exposure to U.S. subprime RMBS after taking into account
exchange of our membership interest in Visa Canada Association for credit default swaps that provide $1,113 million of protection and are
shares of Visa Inc. also contributed to the increase. These factors were either collateralized or with counterparties rated AAA by S&P and Aaa
partially offset by the writedowns on the valuation of U.S. subprime by Moody’s.
residential mortgage-backed securities (RMBS) and collateralized
debt obligations of asset-backed securities (CDOs of ABS) reflecting Canadian non-bank-sponsored asset-backed commercial paper
the deterioration in credit markets since July 2007, higher provisions As at October 31, 2007, we had $4 million of direct holdings of
for credit losses reflecting portfolio growth and higher impaired loans Canadian non-bank-sponsored asset-backed commercial paper
in our U.S. residential builder finance business, and higher credit card conduits where liquidity is contingent on a general market disruption.
customer loyalty reward program costs. Also partly offsetting the We are not a significant participant in this market as a distributor or a
favourable factors were higher costs in support of our business growth liquidity provider.
and the negative impact of a stronger Canadian dollar on the translated
value of our U.S. dollar-denominated earnings. The Tier 1 capital ratio Structured investment vehicles
of 9.4% was down 20 bps from 9.6% a year ago, while the Total capital We had $1 million of direct holdings, $140 million of committed liquid-
ratio of 11.5% was down 40 bps from 11.9% a year ago. ity facilities and $88 million of normal course interest rate derivatives
with structured investment vehicles (SIVs) as at October 31, 2007.
U.S. subprime Our liquidity facilities remained undrawn at October 31, 2007 and we
In October 2007, the credit markets deteriorated dramatically after do not consider any of our positions to be impaired. We do not manage
rating agencies downgraded a broad group of U.S. subprime RMBS and any SIVs.
CDOs of ABS. Following these events, we recognized a charge of
$357 million before-tax in Capital Markets, consisting of writedowns Impact of U.S. vs. Canadian dollar
on the fair value of our direct holdings of U.S. subprime RMBS and The translated value of our consolidated results is impacted by
CDOs of ABS and related credit default swaps. fluctuations in the respective exchange rates relative to the Canadian
Our Capital Markets holdings of RMBS and CDOs of ABS arose dollar. The following table depicts the effect of translating current year
primarily in relation to our role in structuring CDOs of ABS and are Canadian dollar/U.S. dollar consolidated results at the current
classified as held-for-trading, with unrealized changes in fair value exchange rate in comparison to the historical period’s exchange rate.
reflected in Non-interest income. Our other holdings are RMBS and are We believe this provides the reader with the ability to assess the
classified as available-for-sale and unrealized changes in fair value underlying results on a more comparable basis, particularly given the
are generally reflected in Other comprehensive income. These changes magnitude of the recent changes in the exchange rate and the resulting
are reflected in Non-interest income only if management determines impact on our results.
that it is appropriate that the value be written down (referred to as Certain of our business segment results are also impacted by
“other-than-temporary impairment”). fluctuations in the U.S. dollar, Euro and British pound exchange rates.
For further details, refer to the Impact of foreign exchange rates on our
business segments section.
Royal Bank of Canada: Annual Report 2007 43
Management’s Discussion and Analysis
In 2007, the Canadian dollar appreciated 4% on average com-
Impact of U.S. dollar vs. Canadian dollar Table 5
pared to a year ago resulting in a $47 million decrease in the translated
2007 vs. 2006 vs. value of our U.S. dollar-denominated net income and a decrease of
(C$ millions, except per share amounts) 2006 2005
$.04 in our current year’s diluted EPS.
Canadian/U.S. dollar exchange rate (average)
2007 $ 1.093 $ Impact of the new financial instruments accounting standards
2006 1.132 1.132
On November 1, 2006, we adopted three new accounting standards
2005 1.214
Percentage change in average US$ related to financial instruments that were issued by the CICA . The
equivalent of C$1.00 (1) 4% 7% standards require a greater portion of our Consolidated Balance Sheet
to be measured at fair value with changes in the fair values reported
Reduced total revenue $ 230 $ 425
in income in the period they occur, except for available-for-sale securi-
Reduced non-interest expense 139 215
Reduced net income 47 123 ties, derivatives designated as cash flow hedges, and hedges of net
investments in foreign operations, the changes in fair value of which
Reduced basic EPS $ .04 $ .10
are recognized in OCI. The standards also provide new guidance on the
Reduced diluted EPS $ .04 $ .09
accounting for derivatives in hedging relationships.
(1) Average amounts are calculated using month-end spot rates for the period.
The following table provides the main impacts on our
Consolidated Statements of Income arising from the application of the
new financial instruments accounting standards. For further details
about the financial instruments accounting standards, refer to Notes 1
and 2 to our Consolidated Financial Statements.
Impact of the new financial instruments accounting standards Table 6
(C$ millions) 2007 Significantly impacted segments
Net interest income $ 22 Canadian Banking
Non-interest income
Insurance premiums, investment and fee income (160) Canadian Banking
Trading revenue 18 Capital Markets
Other 35 Wealth Management
Other 8 Corporate Support
Total revenue $ (77)
Insurance policyholder benefits, claims and acquisition expense (154) Canadian Banking
Net income 55
Canadian Banking Corporate Support
For the year ended October 31, 2007, we recognized a $22 million For the year ended October 31, 2007, we recognized a gain of
increase in net interest income related to the application of the effec- $8 million. This consisted of a $32 million gain in Non-interest income –
tive interest method on our residential mortgage portfolio. In addition, Other related to certain long-term funding notes and subordinated
we recorded a loss of $160 million in Insurance premiums, investment debentures that were issued and designated as held-for-trading liabili-
and fee income related to the changes in the fair values of the securi- ties, including a $29 million gain related to the widening of our own
ties backing our life and health insurance businesses. These losses credit spread during the year. These amounts were largely offset by
were largely offset by a corresponding $154 million decrease in the $24 million of mark-to-market losses mainly related to the recognition
measurement of certain liabilities related to life and health insurance of the ineffectiveness of hedged items and the related derivatives in
policies, recorded in Insurance policyholder benefits, claims and hedge accounting relationships.
acquisition expense.
Summary of 2006 and 2005
Capital Markets In 2006, we achieved net income of $4,728 million, up $1,341 million,
For the year ended October 31, 2007, we recognized a gain of or 40%, from 2005. Our strong earnings reflected solid business
$18 million in Trading revenue as a result of the net increase in fair growth across all business segments and our successful execution of
values in various trading portfolios previously measured at amortized growth initiatives, despite the negative impact of the strong Canadian
cost. This gain includes a $59 million gain on our deposit liabilities dollar on the translated value of our foreign currency-denominated
designated as held-for-trading resulting from the widening of our own results. Our 2005 results reflected the Enron litigation-related provi-
credit spread during the year. sion. Our strong results in 2006 were also underpinned by generally
favourable economic and credit conditions in both domestic and inter-
Wealth Management national markets.
For the year ended October 31, 2007, we recorded a $35 million foreign In 2006, the Canadian economy grew by 2.8%, primarily bol-
currency translation gain in Non-interest income – Other related to stered by robust domestic demand. These factors were partially offset
deposits used to fund certain Available-for-sale securities denomi- by a weakening in exports and manufacturing activities against a
nated in foreign currencies in order to minimize exposure to changes backdrop of a strong Canadian dollar, high but falling energy prices,
in foreign exchange rates. The corresponding foreign currency transla- slowing U.S. demand and competition from emerging markets. The
tion loss on the related Available-for-sale securities was recorded U.S. economy recorded a growth rate of 2.9%, reflecting solid con-
in AOCI. sumer and business spending supported by strong balance sheets as
well as strength in the labour market, though partly restrained by the
lagged effects of increases in interest rates and high but falling
energy prices.
44 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
During 2006, strong consumer lending was supported by favour- In 2005, the Canadian economy grew by 3.1% (1) , reflecting
able labour market conditions and a relatively low interest rate strong consumer and business spending underpinned by low inter-
environment. Business lending remained solid, albeit in part offset est rates, robust employment growth and rising house prices, albeit
by surpluses of internally generated funds available for capital and partially offset by the adverse effects of a strong Canadian dollar and
inventory investment. The favourable credit environment, together higher energy prices. The U.S. economy recorded a growth rate of
with healthy household and corporate balance sheets, continued to 3.1% (1) , fuelled by strong consumer spending amid solid job growth
support strong consumer and business credit quality. Capital market and surging house prices, despite increases in interest rates and
conditions were generally favourable, characterized by buoyant M&A energy prices and the dampening impacts of hurricanes Katrina, Rita
activity in Canada and strong performance of natural resource-based and Wilma. Business investment in the U.S. was buoyed by both
equities. Debt origination activity in the U.S. and Europe weakened in capital and inventory investment. Strong consumer credit quality was
2006 in part due to rising interest rates and the negative impact of the supported by resilient debt-servicing capacity and high household
strengthening of the Canadian dollar. liquidity, while business credit quality continued to reflect a favour-
During 2006, a number of specified items were identified, which able credit and business environment with a general reduction in
had minimal impacts on our overall results as their effects largely defaults and bankruptcies.
offset each other. We realized a favourable resolution of an income During 2005, we took action to mitigate the uncertainties regard-
tax audit related to prior years, resulting in a $70 million reduction in ing Enron-related matters, including the settlement of our part of the
income tax expense. We received $51 million related to the termina- MegaClaims bankruptcy lawsuit brought by Enron against RBC and
tion of an agreement. We reversed $50 million of general allowance a number of financial institutions for $31 million (US$25 million). In
related to our corporate loan portfolio. We also recorded a net gain of addition, we settled an additional $29 million (US$24 million) for rec-
$40 million on the exchange of New York Stock Exchange (NYSE) seats ognition of claims against the Enron bankruptcy. We also established
for shares in the NYSE Group (NYX). We incurred a net charge of a provision of $591 million (US$500 million) or $326 million after-
$16 million ($19 million after-tax, which included a write-off of tax (US$276 million after-tax) for Enron litigation-related matters.
deferred taxes) related to the transfer of our Institutional & Investor We recorded a charge of $203 million (US$173 million) before- and
Services business to the joint venture RBC Dexia IS. We recorded a after-tax for estimated net claims for damages related to hurricanes
$61 million (before-tax and after-tax) charge in our insurance business Katrina, Rita and Wilma. We completed the sale of Liberty Insurance
for additional estimated net claims for damages predominantly related Services Corporation (LIS) to IBM Corporation (IBM), and entered into
to hurricane Wilma, which occurred in late 2005. In addition, we made a long-term agreement with IBM to perform key business processes
a $72 million adjustment to increase our credit card customer loyalty for RBC Insurance U.S. operations. We also completed the sale of cer-
reward program costs. tain assets of RBC Mortgage Company (RBC Mortgage) to Home123
In 2005, net income was $3,387 million, up $584 million, or 21%, Corporation.
from 2004. Our strong earnings were supported by our successful
(1) Reflects revised data from Statistics Canada and the Bureau of Economic Analysis.
execution of client-focused initiatives and favourable economic condi-
tions, despite the negative impact of an Enron Corp. litigation-related
provision and charges for net claims related to hurricanes Katrina, Rita
and Wilma.
Total revenue Table 7
(C$ millions) 2007 2006 2005
Interest income $ 26,377 $ 22,204 $ 16,981
Interest expense 18,845 15,408 10,188
Net interest income $ 7,532 $ 6,796 $ 6,793
Investments (1) $ 4,405 $ 3,786 $ 3,357
Insurance (2) 3,152 3,348 3,270
Trading 2,261 2,574 1,594
Banking (3) 2,620 2,391 2,326
Underwriting and other advisory 1,217 1,024 1,026
Other (4) 1,275 718 818
Non-interest income $ 14,930 $ 13,841 $ 12,391
Total revenue $ 22,462 $ 20,637 $ 19,184
Additional information
Total trading revenue (5)
Net interest income – related to trading activities $ (390) $ (539) $ 21
Non-interest income – trading revenue 2,261 2,574 1,594
Total $ 1,871 $ 2,035 $ 1,615
Total trading revenue by product (5)
Interest rate and credit $ 693 $ 1,174 $ 1,025
Equities 823 561 355
Foreign exchange and commodities 355 300 235
Total $ 1,871 $ 2,035 $ 1,615
(1) Includes brokerage, investment management and mutual funds.
(2) Includes premiums, investment and fee income.
(3) Includes service charges, foreign exchange other than trading, card services and credit fees.
(4) Includes other non-interest income, gain/loss on securities sales and securitization.
(5) Total trading revenue comprises trading-related revenue recorded in Net interest income and Non-interest income. Total trading revenue includes cash and related derivatives.
Royal Bank of Canada: Annual Report 2007 45
Management’s Discussion and Analysis
2007 vs. 2006 our international insurance operations, which had supported our
Total revenue increased $1,825 million, or 9%, from a year ago. property catastrophe reinsurance business, as we exited this busi-
Excluding the impact of the new financial instruments accounting stan- ness completely this year, a $35 million foreign exchange translation
dards, revenue was up $1,902 million, or 9%. The increase was largely gain on certain deposits resulting from the implementation of the new
due to continued strong balance and volume growth in our banking financial instruments accounting standards, and higher private equity
and wealth management businesses and a gain related to the Visa Inc. gains and distributions also contributed to the increase.
restructuring. Higher revenue from several capital markets businesses
also contributed to this increase. The strong growth largely reflected 2006 vs. 2005
the successful execution of our strategy including acquisitions, as well Total revenue increased $1,453 million, or 8%, from 2005, largely due
as generally favourable market conditions for most of the year. These to record trading results on improved market conditions and solid
factors were partially offset by writedowns on the valuation of U.S. business growth in our wealth management and banking businesses
subprime RMBS and CDOs of ABS, the negative impact of a stronger reflecting successful execution of our growth initiatives and favourable
Canadian dollar on the translated value of our U.S. dollar-denominated market conditions. Strong M&A activity and the net gain on the exchange
revenue and higher credit card customer loyalty reward program costs. of our NYSE seats for NYX shares also contributed to the increase.
For a reconciliation of revenue excluding the impact of the new finan- These factors were partially offset by a reduction of $425 million due to
cial instruments accounting standards, refer to the Key performance the negative impact of the stronger Canadian dollar on the translated
and non-GAAP measures section. value of our U.S. dollar-denominated revenue, lower debt and equity
Net interest income increased $736 million, or 11%, largely origination activity and certain favourable items recorded in 2005.
driven by strong loan and deposit growth. Net interest margin of Net interest income increased $3 million. Strong loan and deposit
1.30% was down 5 bps compared to the prior year. growth and increased spreads on deposits and personal investment
Investments-related revenue increased $619 million, or 16%, products were mostly offset by funding costs related to certain equity
primarily due to continued growth in fee-based client assets reflect- trading strategies and the impact of higher securitization balances.
ing strong net sales, capital appreciation and the recruitment and Investments-related revenue increased $429 million, or 13%,
retention of experienced advisors. Growth in custodian and securities primarily due to growth in fee-based client assets reflecting strong net
lending businesses reflecting strong market activities, and higher sales and capital appreciation and the inclusion of Abacus Financial
transactional volumes in our brokerage businesses also contributed to Services Group Limited. Higher transactional volumes in our full
the increase. service and self-directed brokerage businesses also contributed to the
Insurance-related revenue decreased $196 million, or 6%. increases.
Excluding the impact of the new financial instruments accounting Insurance-related revenue increased $78 million, or 2%, primarily
standards, revenue decreased $36 million, or 1%, from the prior year, reflecting growth in our Canadian life business and European life
reinsurance business. This was partially offset by lower revenue in
largely reflecting lower U.S. annuity sales mainly due to relatively
our U.S. life business largely due to lower annuity sales, the negative
lower long-term interest rates and lower revenue from our property
impact of a stronger Canadian dollar on the translated value of our
catastrophe reinsurance business, which we exited completely this
U.S. dollar-denominated revenue and lower revenue from property
year. These factors were partially offset by growth in our European
catastrophe reinsurance reflecting our strategic reduction in exposure,
life reinsurance and Canadian businesses. For a reconciliation of
as we ceased underwriting new business.
Insurance-related revenue excluding the impact of the new financial
Banking revenue was up $65 million, or 3%, mainly due to higher
instruments accounting standards, refer to the Key performance and
service fees, higher credit fees related to our investment banking
non-GAAP measures section.
activity and increased foreign exchange revenue due to higher trans-
Banking revenue was up $229 million, or 10%, mainly due to
action volume. These factors were partially offset by higher customer
higher transaction volumes and client balances and increased loan
loyalty reward program costs that were recorded against revenue.
syndication activity. These factors were partially offset by higher Trading revenue increased by $980 million, or 61%. Total trading
credit card customer loyalty reward program costs that were recorded revenue was $2,035 million, up $420 million, or 26%, from a year ago
against revenue. largely due to record trading results on improved market conditions
Trading revenue decreased by $313 million, or 12%. Total trading and growth in certain equity trading strategies. This was partly offset
revenue was $1,871 million, down $164 million, or 8%, from a year by higher funding costs in support of growth in certain equity trading
ago largely due to writedowns totalling $357 million on the valuation strategies.
of U.S. subprime RMBS and CDOs of ABS in our Structured Credit Underwriting and other advisory revenue decreased $2 million
business. on lower equity origination in Canada mainly reflecting slower activity
Underwriting and other advisory revenue increased $193 million, outside the resource sector and lower debt origination largely in the
or 19%, on strong equity origination activity across all geographies U.S. due to the rising interest rate environment. These factors were
and improved M&A results, mainly in the U.S. These factors were largely offset by stronger M&A activity.
partially offset by lower U.S. debt origination activity in part due to Other revenue decreased $100 million, or 12%, largely due to a
the tightening of credit markets in the latter part of 2007 as a result of number of favourable items recorded in 2005 including the gain on the
the U.S. subprime mortgage market concerns. sale of an Enron-related claim, a cumulative accounting adjustment
Other revenue increased $557 million, or 78%, largely due to related to our ownership interest in an investment and the gain on the
a $326 million gain related to the Visa Inc. restructuring and gains sale of LIS. These factors were partially offset by the receipt of a fee
on the fair valuing of credit derivatives used to economically hedge related to the termination of an agreement and the net gain on the
our corporate loan portfolio. A favourable adjustment of $40 million exchange of our NYSE seats for NYX shares, which were both recorded
related to the reallocation of certain foreign investment capital from in 2006.
Net interest income and margin Table 8
(C$ millions, except percentage amounts) 2007 2006 2005
Net interest income $ 7,532 $ 6,796 $ 6,793
Average assets (1) 581,000 502,100 445,300
Net interest margin (2) 1.30% 1.35% 1.53%
(1) Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
(2) Net interest income as a percentage of average assets.
46 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Change in net interest income (1) Table 9
2007 vs. 2006 2006 vs. 2005
Increase (decrease) Increase (decrease)
due to changes in due to changes in
Average Average Net Average Average Net
(C$ millions) volume (2) rate (2) change volume (2) rate (2) change
Assets
Deposits with other banks
Canada $ 11 $ (9) $ 2 $ 10 $ – $ 10
United States 71 (50) 21 11 89 100
Other International 31 4 35 35 104 139
Securities
Trading 1,142 423 1,565 863 482 1,345
Available-for-sale (3) (230) 141 (89) – – –
Investments (3) – – – 22 216 238
Asset purchased under reverse repurchase
agreements and securities borrowed 783 (160) 623 404 1,069 1,473
Loans
Canada
Retail 1,025 194 1,219 697 423 1,120
Wholesale – (217) (217) 146 (144) 2
United States 348 (218) 130 108 376 484
Other International 778 106 884 172 140 312
Total interest income $ 3,959 $ 214 $ 4,173 $ 2,468 $ 2,755 $ 5,223
Liabilities
Deposits
Canada $ (1) $ 646 $ 645 $ 122 $ 1,178 $ 1,300
United States 264 281 545 238 733 971
Other International 1,344 528 1,872 754 737 1,491
Obligations related to securities sold short 386 (460) (74) 197 493 690
Obligations related to assets sold under
repurchase agreements and securities loaned 542 (60) 482 341 421 762
Subordinated debentures (66) (15) (81) (18) (5) (23)
Other interest-bearing liabilities 89 (41) 48 (115) 144 29
Total interest expense $ 2,558 $ 879 $ 3,437 $ 1,519 $ 3,701 $ 5,220
Net interest income $ 1,401 $ (665) $ 736 $ 949 $ (946) $ 3
(1) Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.
(2) Volume/rate variance is allocated on the percentage relationship of changes in balances and changes in rates to the total net change in net interest income.
(3) Available-for-sale securities are carried at fair value. Prior to November 1, 2006, Available-for-sale securities were classified as investment securities and were carried at amortized cost.
2007 vs. 2006 2006 vs. 2005
Net interest margin decreased 5 bps reflecting the impact of changes Net interest margin decreased 18 bps compared to 2005, reflecting
in product mix, an increase in lower-yielding and non-interest-earning lower net interest income due to higher funding costs in support of
assets, competitive pressures on our U.S. deposit business, and the growth in certain equity trading strategies. An increase in lower-
reversal of accrued interest on higher impaired loans in the U.S. yielding and non-interest-earning assets, which generate non-interest
Net interest income increased $736 million, or 11%, largely income, largely in support of our trading and other business activities
driven by strong loan and deposit growth in our banking businesses. also contributed to the decrease. This decrease was partially offset by
As noted in Table 9, we experienced higher growth in lower- stronger loan and deposit growth and increased spreads on deposits
yielding and non-interest-earning assets, including trading securities and personal investment products.
and assets purchased under reverse repurchase agreements and
securities borrowed largely in support of our trading and other busi-
ness activities, which generate non-interest income. For further
details, refer to Table 58 in the Additional financial information section.
Non-interest expense Table 10
(C$ millions) 2007 2006 2005
Salaries $ 3,541 $ 3,192 $ 3,101
Variable compensation 2,975 2,827 2,309
Stock-based compensation 194 169 169
Benefits and retention compensation 1,150 1,080 1,103
Human resources $ 7,860 $ 7,268 $ 6,682
Equipment 1,009 957 960
Occupancy 839 792 749
Communications 723 687 632
Professional and other external services 838 844 796
Other expenses 1,204 947 1,538
Non-interest expense $ 12,473 $ 11,495 $ 11,357
Royal Bank of Canada: Annual Report 2007 47
Management’s Discussion and Analysis
2007 vs. 2006 2006 vs. 2005
Non-interest expense increased $978 million, or 9%, compared to the Non-interest expense increased $138 million, or 1%, compared to
prior year, primarily reflecting higher costs due to increased business 2005, largely reflecting higher variable compensation primarily in our
levels, which included additional sales and service personnel and higher Capital Markets and Wealth Management segments due to strong busi-
variable compensation on higher commission-based revenue in Wealth ness performance. Higher costs in support of our growth initiatives,
Management. Increased sundry losses and higher processing and including a higher level of sales personnel and infrastructure in our
system development costs also contributed to the increase. Additional distribution network, increased costs related to systems application
costs in support of our growth initiatives, including our recent acquisi- development, higher marketing and advertising costs and a larger
tions, and de novo branch expansion and branch upgrade programs also number of branches also contributed to the increase. These factors
contributed to the increase. These factors were partially offset by the were partially offset by the reduction in the translated value of U.S.
favourable impact of a stronger Canadian dollar on the translated value dollar-denominated expenses due to the stronger Canadian dollar.
of the U.S. dollar-denominated expenses and lower variable compensa- The Enron litigation-related provision and the settlement of the Enron
tion in Capital Markets commensurate with weaker results. MegaClaims bankruptcy lawsuit were recorded in 2005.
Provision for credit losses Table 11
(C$ millions) 2007 2006 2005
Residential mortgages $ 13 $ 6 $ 2
Personal 364 306 259
Credit cards 223 163 194
Small business (1) 34 29 27
Retail $ 634 $ 504 $ 482
Business (2) 148 (22) (93)
Sovereign (3) – – –
Bank – – –
Wholesale $ 148 $ (22) $ (93)
Specific provision $ 782 $ 482 $ 389
General provision 9 (53) 66
Provision for credit losses $ 791 $ 429 $ 455
Specific PCL as a % of average net loans and acceptances .33% .23% .21%
(1) Includes small business exposure managed on a pooled basis.
(2) Includes small business exposure managed on an individual client basis.
(3) Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
2007 vs. 2006 The general provision increased $62 million from a year ago, pri-
Total provision for credit losses ( PCL) increased $362 million, or 84%, marily reflecting a $50 million reversal of the general allowance related
compared to the prior year, which had been at a cyclically low level, to our corporate loan portfolio in the prior year. Higher provisions in
and has trended up towards the historical average. The increase our U.S. residential builder finance business loan portfolio, largely
reflected higher provisions for both of our wholesale and retail loan reflecting a weakening in credit quality as a result of the downturn in
portfolios, primarily reflecting portfolio growth and higher impaired the U.S. housing market, also contributed to the increase.
loans in our U.S. residential builder finance business triggered by the
downturn in the U.S. housing market. Specific PCL as a percentage 2006 vs. 2005
of average net loans and acceptances increased from a year ago, Provision for credit losses decreased $26 million, or 6%, from 2005.
largely reflecting higher impaired loans in our U.S. residential builder The decrease largely reflected a $50 million reversal of the general
finance business. allowance in 2006 related to our corporate loan portfolio in Capital
Specific PCL for retail loans was up $130 million, or 26%, from Markets in light of the continued favourable credit conditions and
a year ago. The increase was primarily attributable to higher provi- the strengthening of the credit quality of our corporate portfolio, the
sions in our credit cards and personal unsecured credit line portfolios, favourable impact of the higher level of securitized credit cards, and
largely reflecting higher loss rates and portfolio growth. the continued strong credit quality of our U.S. loan portfolio. In 2005,
Specific PCL for wholesale loans increased $170 million over the we also recorded a provision related to our 50% proportionate share of
prior year. The increase was largely attributable to our business port- a provision booked at Moneris Solutions, Inc. (Moneris). These factors
folio mainly due to higher impaired loans in our U.S. residential builder were partially offset by higher provisions for our Canadian personal
finance business and higher write-offs in Canada. Lower recoveries in loan and small business portfolios, as well as lower recoveries in our
our corporate loan portfolio this year also contributed to the increase corporate and agriculture loan portfolios.
in provisions.
Insurance policyholder benefits, claims and acquisition expense Table 12
(C$ millions) 2007 2006 2005
Insurance policyholder benefits and claims $ 1,588 $ 1,939 $ 2,103
Insurance policyholder acquisition expense 585 570 522
Insurance policyholder benefits, claims and acquisition expense $ 2,173 $ 2,509 $ 2,625
48 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
2007 vs. 2006 2006 vs. 2005
Insurance policyholder benefits, claims and acquisition expense PBCAE decreased $116 million, or 4%, compared to 2005. The
( PBCAE) decreased $336 million, or 13%, from the prior year. Excluding decrease primarily reflected a $142 million (before- and after-tax)
the impact of the new financial instruments accounting standards and reduction in hurricane-related charges for net claims, as we recorded
the prior year hurricane-related charges, PBCAE decreased $121 mil- $203 million in 2005 related to hurricanes Katrina, Rita and Wilma
lion, or 5%, over last year. The decrease was largely attributable to and $61 million for additional claims in 2006 predominantly related
the impact of lower U.S. annuity sales and a higher level of favourable to hurricane Wilma. The favourable impact on the translated value of
net actuarial liability adjustments this year, which included cumulative U.S. dollar-denominated actuarial liabilities as a result of the stronger
adjustments of $92 million related to prior periods. These factors were Canadian dollar and lower U.S. annuity sales also contributed to the
partially offset by increased costs commensurate with growth in our decrease. These factors were partially offset by higher benefits and
European life reinsurance and Canadian businesses. For a reconcilia- claims costs associated with business growth and a reduced level of
tion of PBCAE excluding the impact of the new financial instruments net favourable actuarial liability adjustments in 2006.
accounting standards, refer to the Key performance and non-GAAP
measures section.
Taxes Table 13
(C$ millions, except percentage amounts) 2007 2006 2005
Income taxes $ 1,392 $ 1,403 $ 1,278
Other taxes
Goods and services and sales taxes $ 208 $ 218 $ 218
Payroll taxes 227 217 220
Capital taxes 117 107 164
Property taxes (1) 97 92 93
Insurance premium taxes 41 39 39
Business taxes 8 7 9
698 680 743
Total income and other taxes $ 2,090 $ 2,083 $ 2,021
Net income before income taxes $ 7,025 $ 6,204 $ 4,702
Effective income tax rate (2) 19.8% 22.6% 27.2%
Effective total tax rate (3) 27.1% 30.3% 37.1%
(1) Includes amounts netted against non-interest income regarding investment properties.
(2) Income taxes, as a percentage of net income before income taxes.
(3) Total income and other taxes as a percentage of net income before income and other taxes.
Our operations are subject to a variety of taxes, including taxes on In addition to the income and other taxes reported in our
income and capital assessed by Canadian federal and provincial Consolidated Statements of Income, we recorded income taxes of
governments and taxes on income assessed by the governments of $946 million in 2007 (2006 – $136 million) in Shareholders’ equity,
international jurisdictions where we operate. Taxes are also assessed an increase of $810 million, primarily reflecting an increase in unreal-
on expenditures and supplies consumed in support of our operations. ized foreign currency translation gains as shown in Note 24 to our
Consolidated Financial Statements.
2007 vs. 2006
Income tax expense decreased $11 million, or 1%, from a year ago, 2006 vs. 2005
despite higher earnings before income taxes. The effective tax rate of Income taxes were up in 2006 compared to 2005, largely reflecting
19.8% compared favourably to 22.6% a year ago. The lower effective higher earnings and the impact of the Enron litigation-related provision
tax rate was largely due to writedowns on the valuation of U.S. sub- recorded in 2005. The effective income tax rate for 2006 decreased
prime RMBS and CDOs of ABS reported by our subsidiaries operating 4.6% primarily due to higher earnings reported by our subsidiaries
in jurisdictions with higher income tax rates, the gain related to the operating in jurisdictions with lower income tax rates, a higher level
Visa Inc. restructuring, which is taxed at the capital gains tax rate, and of income from tax-advantaged sources (Canadian taxable corporate
a higher level of income from tax-advantaged sources (Canadian tax- dividends), and the favourable resolution of income tax audits in 2006
able corporate dividends). related to prior years.
Other taxes increased by $18 million from a year ago, largely due Other taxes decreased $63 million, largely due to lower capital
to increased payroll taxes reflecting higher staffing levels and higher taxes primarily related to recoveries of capital taxes paid in prior
capital taxes due to an increased Canadian capital tax base on which periods and a lower Canadian capital base on which capital taxes
capital taxes are levied. Increased property taxes reflecting a higher are levied.
number of branches also contributed to the increase. These factors
were partially offset by lower goods and services and sales taxes due
to a decrease in the goods and services tax (GST) rate.
Royal Bank of Canada: Annual Report 2007 49
Management’s Discussion and Analysis
Results by geographic segment (1) Table 14
2007 2006 2005
United Other United Other United Other
(C$ millions) Canada States International Total Canada States International Total Canada States International Total
Net interest income $ 6,435 $ 412 $ 685 $ 7,532 $ 6,045 $ 108 $ 643 $ 6,796 $ 5,628 $ 608 $ 557 $ 6,793
Non-interest income 8,605 4,322 2,003 14,930 7,518 4,397 1,926 13,841 6,878 3,955 1,558 12,391
Total revenue 15,040 4,734 2,688 22,462 13,563 4,505 2,569 20,637 12,506 4,563 2,115 19,184
Provision for (recovery of)
credit losses 696 90 5 791 456 (28) 1 429 433 23 (1) 455
Insurance policyholder benefits,
claims and acquisition expense 1,230 474 469 2,173 1,379 683 447 2,509 1,270 809 546 2,625
Non-interest expense 7,409 3,405 1,659 12,473 7,056 3,038 1,401 11,495 6,685 3,595 1,077 11,357
Business realignment charges – – – – – – – – 45 – – 45
Income taxes and
non-controlling interest 1,788 (13) (242) 1,533 1,495 13 (61) 1,447 1,299 (64) 30 1,265
Net income from continuing
operations $ 3,917 $ 778 $ 797 $ 5,492 $ 3,177 $ 799 $ 781 $ 4,757 $ 2,774 $ 200 $ 463 $ 3,437
Net income (loss) from
discontinued operations $ – $ – $ – $ – $ – $ (29) $ – $ (29) $ – $ (50) $ – $ (50)
Net income $ 3,917 $ 778 $ 797 $ 5,492 $ 3,177 $ 770 $ 781 $ 4,728 $ 2,774 $ 150 $ 463 $ 3,387
(1) For geographic reporting, our segments are grouped into Canada, United States and Other International. Transactions are primarily recorded in the location that best reflects the risk
due to negative changes in economic conditions and prospects for growth due to positive economic changes. This location frequently corresponds with the location of the legal entity
through which the business is conducted and the location of our clients. Transactions are recorded in the local currency and are subject to foreign exchange rate fluctuations with
respect to the movement of the Canadian dollar.
2007 vs. 2006 2006 vs. 2005
Net income in Canada was $3,917 million, up $740 million, or 23%, Net income in Canada was $3,177 million, up $403 million, or 15%,
compared to the prior year. This increase largely reflected strong compared to 2005. This increase largely reflected strong revenue
volume and balance growth in our domestic banking and wealth man- growth in our wealth management and banking businesses due to our
agement businesses and a gain related to the Visa Inc. restructuring. successful execution of growth initiatives, the continuing favourable
Higher trading results, improved equity origination activity and higher economic conditions and stronger M&A activity. These factors were
loan syndication activity also contributed to the increase. These fac- partly offset by higher variable compensation on stronger business
tors were partially offset by higher costs reflecting increased business performance and increased costs in support of business growth.
levels and in support of growth initiatives, higher provisions for credit U.S. net income of $770 million was up $620 million, or 413%,
losses and higher credit card customer loyalty reward program costs from 2005 and comprises net income from continuing operations
this year. of $799 million and a net loss from discontinued operations of
U.S. net income of $778 million was up $8 million, or 1%, from $29 million. U.S. net income from continuing operations was up
the prior year. Solid revenue growth reflecting the inclusion of our $599 million, or 300%, compared to 2005 largely reflecting the Enron
recent acquisitions and improved equity origination and M&A activ- litigation-related provision and strong trading results in 2006. These
ity was mostly offset by the negative impact of the stronger Canadian factors were partially offset by lower debt originations, lower U.S.
dollar on the translated value of our U.S. dollar-denominated earnings, annuity sales, the negative impact of the stronger Canadian dollar on
higher costs in support of business growth and higher provision for the translated value of U.S. dollar-denominated income and the gain
credit losses, which primarily reflected higher impaired loans in our recorded in the prior year on the sale of LIS in 2005.
U.S. residential builder finance business. Net loss from discontinued operations of $29 million in 2006
Other international net income of $797 million was up $16 million, compared to a net loss of $50 million in 2005. The 2006 net loss
or 2%, from 2006, partly due to stronger insurance results reflecting reflected charges related to the wind down of operations of RBC
the absence of hurricane-related charges this year and a favourable Mortgage Company. The 2005 net loss largely reflected charges
adjustment related to the reallocation of certain foreign investment related to the sale and wind down of operations, including the costs of
capital this year. Growth at RBC Dexia IS also contributed to the closing RBC Mortgage Company’s Chicago office and certain branches,
increase. These factors were largely offset by lower trading results employee incentive payments and the writedown of certain assets.
in certain fixed income businesses as a result of writedowns on the Other international net income was up $318 million, or 69%,
valuation of U.S. subprime RMBS and CDOs of ABS. from 2005, mainly reflecting the lower net estimated hurricane-related
charges and income tax amounts, which were largely related to enter-
prise-funding activities and solid business growth in our European
life reinsurance business. These factors were partially offset by lower
revenue from property catastrophe reinsurance reflecting our strategic
reduction in exposure.
Related party transactions
In the ordinary course of business, we provide normal banking We grant loans to directors, officers and other employees at rates
services, operational services and enter into other transactions with normally accorded to preferred clients. In addition, we offer deferred
associated and other related corporations, including our joint venture share and other plans to non-employee directors, executives and
entities, on terms similar to those offered to non-related parties. certain other key employees. For further information, refer to Notes 9
and 29 to our Consolidated Financial Statements.
50 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Quarterly financial information
Results and trend analysis
Our quarterly earnings, revenue and expenses are impacted by a general economic conditions and competition. The following table
number of trends and recurring factors which include seasonality, summarizes our results for the last eight quarters.
Quarterly results Table 15
2007 2006
(C$ millions, except per share amounts) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1
Net interest income $ 1,828 $ 1,965 $ 1,889 $ 1,850 $ 1,731 $ 1,766 $ 1,617 $ 1,682
Non-interest income 3,787 3,515 3,780 3,848 3,618 3,440 3,505 3,278
Total revenue $ 5,615 $ 5,480 $ 5,669 $ 5,698 $ 5,349 $ 5,206 $ 5,122 $ 4,960
Non-interest expense 3,093 3,165 3,148 3,067 2,955 2,861 2,928 2,751
Provision for credit losses 263 178 188 162 159 99 124 47
Insurance policyholder benefits,
claims and acquisition expense 637 343 677 516 611 627 619 652
Net income before income taxes and
non-controlling interest in subsidiaries $ 1,622 $ 1,794 $ 1,656 $ 1,953 $ 1,624 $ 1,619 $ 1,451 $ 1,510
Income taxes 255 349 353 435 342 381 348 332
Non-controlling interest in net income
of subsidiaries 43 50 24 24 19 44 (25) 6
Net income from continuing operations $ 1,324 $ 1,395 $ 1,279 $ 1,494 $ 1,263 $ 1,194 $ 1,128 $ 1,172
Net income (loss) from discontinued operations – – – – (1) (17) (10) (1)
Net income $ 1,324 $ 1,395 $ 1,279 $ 1,494 $ 1,262 $ 1,177 $ 1,118 $ 1,171
Earnings per share – basic $ 1.02 $ 1.07 $ .99 $ 1.16 $ .97 $ .91 $ .86 $ .90
– diluted $ 1.01 $ 1.06 $ .98 $ 1.14 $ .96 $ .90 $ .85 $ .89
Segment net income (loss)
Canadian Banking $ 899 $ 699 $ 618 $ 771 $ 675 $ 660 $ 511 $ 580
Wealth Management 180 177 194 211 164 136 159 145
U.S. & International Banking 21 87 67 67 79 82 62 38
Capital Markets 186 360 350 396 300 303 414 338
Corporate Support 38 72 50 49 45 13 (18) 71
Net income $ 1,324 $ 1,395 $ 1,279 $ 1,494 $ 1,263 $ 1,194 $ 1,128 $ 1,172
Period average USD equivalent of C$1.00 (1) $ 1.001 $ .937 $ .874 $ .861 $ .897 $ .896 $ .877 $ .865
Period-end USD equivalent of C$1.00 1.059 .937 .901 .850 .890 .884 .894 .878
(1) Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
Seasonality insurance business results were negatively impacted by hurricane-
Seasonal factors impact our results in most quarters. The second related charges of $61 million (before- and after-tax). During the same
quarter has fewer days than the other three quarters, resulting in a quarter, we also recorded a $50 million reversal of the general allow-
decrease primarily in net interest income and certain expense items. ance in light of the strong credit quality of our corporate loan portfolio,
The third and fourth quarters include the summer months during which partially reflected the favourable credit conditions. Our results
which market activity frequently slows, negatively impacting the over the last eight quarters were also impacted by the acquisition of
results of our capital markets, brokerage and investment management certain businesses. For further discussion, refer to the Overview of
businesses. 2007 section.
Our consolidated net income consistently exceeded $1 billion
Impact of economic and market conditions over the last eight quarters. These strong results largely reflected a
In general, economic conditions remained favourable over most of the general increase in revenue across all our business segments. This
last eight quarters and positively impacted our businesses. Economic positive trend was partially offset by the lower translated value of
conditions were negatively impacted in the latter part of 2007, mainly foreign currency-denominated earnings as a result of the strengthen-
attributable to the U.S. subprime mortgage market concerns. For a ing of the Canadian dollar against the U.S. dollar during most of the
further discussion, refer to the Overview of 2007 section. period, with the effects being more pronounced in the most recent
The strengthening of the Canadian dollar over the period resulted quarter.
in lower translated value of our U.S. dollar-denominated earnings, Non-interest expense generally increased over the last eight
primarily in our wholesale banking business and U.S. retail operations. quarters, largely reflecting increased variable compensation on strong
business performance and higher costs due to increased business activ-
Overview and consolidated results ity volume, acquisitions and higher spending in support of our growth
Over the last eight quarters, our results were affected by a number initiatives.
of favourable and unfavourable items or events. Our fourth quarter Provision for credit losses was at a cyclically low level during
2007 results were impacted by the writedowns on the valuation of most of the period, primarily reflecting a generally benign credit envi-
U.S. subprime RMBS and CDOs of ABS, the gain related to the Visa Inc. ronment and favourable corporate recoveries. However, it increased
restructuring, and higher credit card customer loyalty reward program over the past year due to portfolio growth, as well as increasing loss
costs. In the first quarter of 2007 we recorded a favourable adjustment rates and higher impairments, both of which have trended up towards
related to the reallocation of foreign investment capital and our historical averages. In the fourth quarter of 2007, the provision for
Royal Bank of Canada: Annual Report 2007 51
Management’s Discussion and Analysis
credit losses increased in our U.S. & International Banking segment Business segment results
due to higher impaired loans, primarily driven by the downturn in the Canadian Banking net income generally increased over the last eight
U.S. housing market. The decrease in provisions in the first quarter of quarters reflecting strong volume growth across most business lines.
2006 was primarily due to a $50 million reversal of the general allow- Margins have decreased slightly over the latter part of 2007, primarily
ance in light of the strong credit quality of our corporate loan portfolio due to strong market competition. Our results in the fourth quarter
at that time. of 2007 were favourably impacted by the gain related to the Visa Inc.
PBCAE fluctuated considerably over the period. Although under- restructuring, which was partly offset by higher credit card customer
lying business growth has generally increased PBCAE, there can be loyalty reward program costs. Also, the first quarter of 2007 was
significant quarterly volatility resulting from claims experience, actu- positively impacted by a favourable adjustment related to the realloca-
arial liability adjustments and capital market impacts on equities tion of foreign investment capital while the first quarter of 2006 was
backing universal life policyholder funds. The impact of the new adversely impacted by hurricane-related charges.
financial instruments accounting standards implemented in the first Wealth Management net income has generally trended higher
quarter of 2007 introduced additional volatility to this line. Other than over the last eight quarters, driven largely by strong growth in fee-
claims experience and actuarial liability adjustments, these items are based client assets across all business lines reflecting new sales,
predominantly offset in Insurance-related revenue. As well, the first capital appreciation and the recruitment and retention of experienced
quarter of 2006 was impacted by hurricane-related charges. advisors. This has been partially offset by higher variable compensa-
Our effective income tax rate has generally trended downward tion commensurate with commission-based revenue and higher costs
from 22.0% to 15.7% over the period, despite higher earnings before in support of business growth, including recent acquisitions.
income taxes. This largely reflected higher income from tax-advantaged U.S. & International Banking results were generally stable dur-
sources (Canadian taxable corporate dividends), favourable income ing the period except for the fourth quarter of 2007. The decrease in
tax settlements in the first quarter of 2006 and the second and third earnings in the fourth quarter of 2007 was primarily attributable to the
quarters of 2007. The fourth quarter of 2007 reflected writedowns on higher provisions in our U.S. residential builder finance loan portfolio
the valuation of U.S. subprime RMBS and CDOs of ABS reported by our reflecting higher impaired loans. In addition, net income was impacted
subsidiaries operations in jurisdictions with higher income tax rates by higher costs in support of business growth, including recent acqui-
and a lower tax rate on the gain related to the Visa Inc. restructuring. sitions and de novo branch openings.
Non-controlling interest in net income of subsidiaries fluctuated Capital Markets recorded a general improvement in earnings over
over the period, which depends on the net income attributed to third- the period, with the exception of the fourth quarter of 2007, which was
party investors in entities in which we do not have 100% ownership, impacted by the writedowns on the valuation of U.S. subprime RMBS
but are required to consolidate. and CDOs of ABS over concerns related to the U.S. subprime mortgage
market. Throughout 2006 and most of 2007, our diverse business
and product offerings, together with business expansions and grow-
ing global distribution capabilities, contributed to this positive trend.
However, these factors were partially offset by the lower translated
value of U.S. dollar- and British pound-denominated earnings resulting
from the stronger Canadian dollar.
Fourth quarter 2007 performance
Fourth quarter net income of $1,324 million was up $62 million, or 5%, Non-interest expense increased $138 million, or 5%, from a
from a year ago despite the $48 million unfavourable impact of the year ago, largely reflecting higher costs in support of our business
stronger Canadian dollar on the translated value of U.S. dollar- initiatives, including higher staffing levels, our recent acquisitions and
denominated earnings. Diluted EPS were $1.01, up 5%. ROE was de novo branch openings. These factors were partially offset by lower
23.0% compared to 23.9% a year ago. The increase was primarily due variable compensation in Capital Markets due to weaker results.
to a gain on the Visa Inc. restructuring, higher equity derivatives and Provision for credit losses increased $104 million from a year ago,
foreign exchange trading results and solid volume and balance growth largely reflecting higher impaired loans in our U.S. residential builder
in our banking and wealth management businesses. These factors finance business portfolio, primarily driven by the downturn in the
were partly offset by writedowns on the valuation of U.S. subprime U.S. housing market. Higher provisions commensurate with growth
RMBS and CDOs of ABS, and an adjustment to increase our credit card in our credit card portfolio and higher impairment in our business
customer loyalty reward program costs. portfolio also contributed to the increase.
Total revenue increased $266 million, or 5%, from a year ago, PBCAE increased $26 million, or 4%, over the prior year, primarily
largely reflecting a gain on the Visa Inc. restructuring, higher equity due to the impact of the new financial instruments accounting stan-
derivatives and foreign exchange trading revenue and continued solid dards, increased costs associated with growth in our European life
volume and balance growth in our banking and wealth management reinsurance business as well as less favourable claims experience
businesses. The favourable impact of the new financial instruments in the current period. These factors were partly offset by reduced
accounting standards, the inclusion of recent acquisitions and expenses associated with lower U.S. annuity sales, a higher level of
improved M&A activity also contributed to the increase. These factors favourable net actuarial liability adjustments, and the favourable
were partly offset by lower trading revenue in our fixed income busi- impact of a stronger Canadian dollar on the translated value of U.S.
nesses reflecting the writedowns on the valuation of U.S. subprime dollar-denominated expenses.
RMBS and CDOs of ABS and an adjustment to increase our credit card
customer loyalty reward program costs.
52 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Business segment results
Results by business segment Table 16
2007 2006 2005
U.S. &
Canadian Wealth International Capital Corporate
(C$ millions) Banking Management Banking Markets (1) Support (1) Total Total Total
Net interest income $ 6,353 $ 427 $ 1,031 $ 453 $ (732) $ 7,532 $ 6,796 $ 6,793
Non-interest income 6,168 3,565 884 3,936 377 14,930 13,841 12,391
Total revenue $ 12,521 $ 3,992 $ 1,915 $ 4,389 $ (355) $ 22,462 $ 20,637 $ 19,184
Non-interest expense 5,285 2,902 1,481 2,769 36 12,473 11,495 11,357
Provision for (recovery of) credit losses 788 1 109 (22) (85) 791 429 455
Insurance policyholder benefits,
claims and acquisition expense 2,173 – – – – 2,173 2,509 2,625
Business realignment charges – – – – – – – 45
Net income before income taxes and
non-controlling interest in net income
of subsidiaries $ 4,275 $ 1,089 $ 325 $ 1,642 $ (306) $ 7,025 $ 6,204 $ 4,702
Net income $ 2,987 $ 762 $ 242 $ 1,292 $ 209 $ 5,492 $ 4,757 $ 3,437
Return on equity (ROE) (2) 34.3% 32.4% 6.9% 26.6% 6.7% 24.6% 23.5% 18.0%
Return on risk capital (RORC) (2) 45.5% 65.1% 11.7% 32.5% n.m. 37.4% 36.7% 29.3%
Average assets (3) $ 220,000 $ 16,600 $ 39,700 $ 311,200 $ (6,500) $ 581,000 $ 502,300 $ 447,100
(1) Net interest income, total revenue and net income before income taxes are presented in Capital Markets on a taxable equivalent basis. The taxable equivalent basis adjustment is
eliminated in the Corporate Support segment. For a further discussion, refer to the How we measure and report our business segments section.
(2) Average risk capital and the Return on risk capital are key performance measures. For further details, refer to Key performance and non-GAAP measures section.
(3) Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
n.m. not meaningful
Canadian Banking growth in RBC Dexia IS, as well as higher loan and deposit growth in
Net income increased $561 million, or 23%, from a year ago. The the U.S. reflecting the inclusion of our acquisitions of Flag and the
increase primarily reflected strong growth across all our business lines AmSouth branches, de novo branch openings and business
as well as a gain related to the Visa Inc. restructuring, partially offset expansion. Our results also reflected higher costs in support of
by higher costs in support of business growth, increased provision for business growth and a loss on the restructuring of our U.S. banking
credit losses and higher credit card customer loyalty reward program investment portfolio this year.
costs this year. Our prior year results also included the hurricane-
related charges and the receipt of a fee related to the termination of Capital Markets
an agreement, whereas this year we included a favourable adjustment Net income decreased $63 million, or 5%, compared to a year ago
related to the reallocation of certain foreign investment capital. largely due to the writedowns on the valuation of U.S. subprime RMBS
and CDOs of ABS in our Structured Credit business. The negative
Wealth Management impact of the stronger Canadian dollar on the translated value of U.S.
Net income for the year of $762 million increased $158 million, or dollar-denominated earnings also contributed to the decrease. These
26%, from a year ago. The increase was largely due to strong earnings factors were partially offset by broad-based revenue growth in many
growth across all our business lines reflecting the ongoing successful other businesses.
execution of our growth initiatives and generally favourable market
conditions. We recorded a foreign exchange translation gain on certain Corporate Support
deposits in the current year related to the implementation of the new Net income of $209 million for the year included income tax amounts
financial instruments accounting standards. largely related to enterprise funding activities that were not allocated
to the business segments and favourable income tax settlements
U.S. & International Banking related to prior years. These factors were partially offset by the mark-
Net income decreased $19 million, or 7%, from the prior year. The to-market losses on derivatives relating to certain economic hedges, a
decrease was largely attributable to increased provision for credit cumulative adjustment for losses resulting from the fair valuing of cer-
losses, primarily reflecting higher impaired loans in our U.S. residential tain derivatives that did not qualify for hedge accounting and higher
builder finance business. This was partially offset by strong business capital taxes that were not allocated to the business segments.
Revenue contribution from our business segments (C$ millions) Net income contribution from our business segments (C$ millions)
25,000 6,000 U.S. & International Banking
U.S. & International Banking
20,000 Wealth Management 4,800 Wealth Management
15,000 Capital Markets 3,600 Capital Markets
Canadian Banking Canadian Banking
10,000 2,400
5,000 1,200
0 0
2005 2006 2007 2005 2006 2007
Royal Bank of Canada: Annual Report 2007 53
Management’s Discussion and Analysis
How we measure and report our business segments
Our management reporting framework is intended to measure the Funds transfer pricing
performance of each business segment as if it were a stand-alone Our funds transfer pricing methodology is used to allocate interest
business and reflect the way that business segment is managed. This income and expense to each business segment. This allocation consid-
approach is intended to ensure that our business segments’ results ers the interest rate risk, liquidity risk and regulatory requirements
reflect all relevant revenue and expenses associated with the conduct of our business segments. Our business segments may retain certain
of their business and it depicts how management views those results. interest rate exposures, subject to management approval, that would
The following highlights the key aspects of how our business be expected in the normal course of operations. Other activities con-
segments are managed and reported: ducted between our business segments are generally conducted at
• Canadian Banking reported results include securitized Canadian market rates.
residential mortgage and credit card loans and related amounts
for income and provision for credit losses. The securitized resi- Taxable equivalent basis (teb)
dential mortgage and credit card loans included as at October 31, Similar to many other institutions, we analyze income from certain
2007 were $19 billion and $4 billion, respectively tax-advantaged sources (Canadian taxable corporate dividends) on a
• Wealth Management reported results include additional taxable equivalent basis. Under this approach, we gross up revenue
disclosures in U.S. dollars for its U.S. & International Wealth from certain tax-advantaged sources, which currently only includes
Management business line, as we review and manage the results our Canadian taxable corporate dividends recorded in Net interest
of this business line largely in U.S. dollars income, to their effective taxable equivalent value with a correspond-
• U.S. & International Banking reported results include additional ing offset recorded in the provision for income taxes. We record teb
disclosure in U.S. dollars for its Banking business line, as we adjustments in Capital Markets and record elimination adjustments
review and manage the results of this business line largely on a in Corporate Support. We believe these adjustments are useful and
U.S. dollar basis reflect how Capital Markets manages its business since it increases
• Capital Markets results are reported on a taxable equivalent the comparability of revenue and related ratios across taxable and our
basis (teb), which grosses up Net interest income from certain principal tax-advantaged sources of revenue. The use of teb adjust-
tax-advantaged sources (Canadian taxable corporate dividends) ments and measures may not be comparable to similar GAAP measures
to their effective taxable equivalent value with a corresponding or similarly adjusted amounts at other financial institutions. The teb
offset recorded in the provision for income taxes. This increases adjustment for 2007 was $332 million (2006 – $213 million, 2005 –
comparability between taxable and tax-advantaged sources $109 million).
of revenue
• Corporate Support results include all enterprise level activities Changes made in 2007
that are undertaken for the benefit of the organization that are The following highlights the key changes we made to our management
not allocated to our four business segments, such as enterprise reporting framework and business segments during the year. All seg-
funding, securitizations and net charges associated with unat- ment results have been revised accordingly for 2006 and 2005. These
tributed capital. The reported results of the Corporate Support changes did not have an impact on our consolidated results or disclo-
segment also reflect consolidation adjustments, including the sure, unless otherwise noted.
elimination of the teb adjustments recorded in Capital Markets. • We revised the assets under administration – RBC Dexia IS
amount for 2006 to reflect the total assets under administration
Key methodologies amount reported by our joint venture. We had previously disclosed
The following outlines the key methodologies and assumptions used only the total assets under custody amount related to RBC Dexia IS.
in our management reporting framework. These assumptions and • We revised our definitions of assets under administration and
methodologies are periodically reviewed by management to ensure assets under management to better align them with our business-
they remain valid. specific practices. This change did not impact the amounts
reported for 2006 and 2005.
Expense allocation • We reclassified certain amounts reported in Capital Markets from
In order to ensure that our business segments’ results include Interest income to Interest expense. There was no impact to Net
expenses associated with the conduct of their business, we allocate interest income as a result of this reclassification.
costs incurred or services provided by GTO and Global Functions, • We reclassified certain amounts reported in Corporate Support
which are directly undertaken or provided on the business segments’ related to interest settlements on swaps in fair value hedge
behalf. For other costs not directly attributable to our business seg- relationships from Non-interest income to Net interest income.
ments, including overhead costs and other indirect expenses, we use This reclassification did not impact results for 2006 and 2005.
our management reporting framework for allocating these costs to each • We reclassified certain deposits reported in Capital Markets and
business segment in a manner that reflects the underlying benefits. U.S. & International Banking related to RBC Dexia IS, in
accordance with the Q2 2007 business segment realignment.
Capital attribution • We reclassified expenses related to internally developed
Our framework also assists in the attribution of capital to our business software from Non-interest expense – Other to more specific
segments in a manner that is intended to consistently measure and Non-interest expense lines. All related comparative amounts
align economic costs with the underlying benefits and risks associated were updated to reflect this reclassification, which impacted the
with the activities of each business segment. The amount of capital Corporate Support segment only and had no impact on total Non-
assigned to each business segment is referred to as attributed capital. interest expense.
Unattributed capital and associated net charges, are reported in • Certain amounts related to trustee services within Canadian
Corporate Support. Banking were reclassified from Non-interest income – Investment
The capital attribution methodologies, detailed in the Capital management and custodial fees to Net interest income to better
management section, involve a number of assumptions and estimates reflect their nature.
that involve judgment and are revised periodically. Any changes to these
factors directly impact other measures such as business segment return
on average common equity and return on average risk capital.
54 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Impact of foreign exchange rates on our business segments
The translated value of our business segment results is impacted by In 2007, the Canadian dollar appreciated 4% on average rela-
fluctuations in the respective exchange rates relative to the Canadian tive to the U.S. dollar and depreciated 5% on average relative to both
dollar. Wealth Management, U.S. & International Banking and Capital the British pound and Euro compared to a year ago. As a result of
Markets each have significant U.S. dollar-denominated operations, the impact of the changes in the respective exchange rates from last
while U.S. & International Banking has material Euro-denominated year, Wealth Management net income was down $9 million, U.S. &
results related to RBC Dexia IS, and Capital Markets has significant International Banking net income was up $4 million, while Capital
British pound-denominated operations. Markets net income was down $30 million. For further discussion,
refer to the applicable business segment results section.
Key performance and non-GAAP measures
Key performance measures effect on the segment ROE and RORC information that we report.
Return on equity and Return on risk capital Other companies that disclose information on similar attributions and
We measure and evaluate the performance of our consolidated opera- related return measures may use different assumptions, judgments
tions and each business segment using a number of financial metrics and methodologies.
such as net income, return on average common equity ( ROE) and RORC is used to measure returns on capital required to support
return on average risk capital ( RORC). We use ROE and RORC as a mea- the risks related to ongoing operations. Our RORC calculations are
sure of return on total capital invested in our businesses. RORC does based on net income available to common shareholders divided by
not have a standardized meaning under GAAP and may not be compa- attributed risk capital (which excludes goodwill and intangibles and
rable to similar measures used by other financial institutions. unattributed capital). The business segment ROE and RORC measures
Our consolidated ROE calculation is based on net income avail- are viewed as useful measures by management for supporting invest-
able to common shareholders divided by total average common equity ment and resource allocation decisions because they adjust for certain
for the period. Business segment ROE calculations are based on annu- items that may affect comparability between business segments and
alized segment net income available to common shareholders divided certain competitors. The following table provides a summary of the
by average attributed capital for the period. For each segment, aver- ROE and RORC calculations.
age attributed capital is based on attributed risk capital and amounts
(1) For internal allocation and measurement purposes, total attributed capital is deemed
invested in goodwill and intangibles (1) .
by management to comprise amounts necessary to support the risks inherent in the
The attribution of capital involves the use of assumptions, judg- businesses (risk capital) and amounts related to historical investments (goodwill
ments and methodologies that are regularly reviewed and revised by and intangibles). Total risk capital and goodwill and intangibles are referred to as
Attributed capital as well as Economic Capital. The difference between total average
management as necessary. The attribution of risk capital is based on common equity and average attributed capital is classified as Unattributed capital
certain assumptions, judgments and models that quantify economic and reported in Corporate Support for segment reporting purposes.
risks as described in the Economic Capital section. Changes to such
assumptions, judgments and methodologies can have a material
Calculation of Return on equity and Return on risk capital Table 17
2007 2006 2005
U.S. &
Canadian Wealth International Capital Corporate
(C$ millions, except for percentage amounts) (1), (2) Banking Management Banking Markets Support Total Total Total
Net income available to common shareholders $ 2,953 $ 753 $ 228 $ 1,272 $ 198 $ 5,404 $ 4,668 $ 3,349
Average risk capital (2) $ 6,500 $ 1,150 $ 1,950 $ 3,900 $ 950 $ 14,450 $ 12,750 $ 11,450
Add: Unattributed capital – – – – 2,000 2,000 2,500 2,300
Goodwill and intangible capital 2,100 1,150 1,400 900 – 5,550 4,650 4,850
Average equity (3) $ 8,600 $ 2,300 $ 3,350 $ 4,800 $ 2,950 $ 22,000 $ 19,900 $ 18,600
Return on equity (ROE) 34.3% 32.4% 6.9% 26.6% 6.7% 24.6% 23.5% 18.0%
Return on risk capital (RORC) 45.5% 65.1% 11.7% 32.5% n.m. 37.4% 36.7% 29.3%
(1) Average risk capital, Goodwill and intangible capital, and Average equity represent rounded figures. These amounts are calculated using methods intended to approximate the average
of the daily balances for the period. ROE and RORC measures are based on actual balances before rounding.
(2) Average risk capital includes Credit, Market (trading and non-trading), Insurance, Operational and Business and fixed assets risk capital. For further details refer to the Capital
management section.
(3) The amounts for the segments are also referred to as attributed capital.
n.m. not meaningful
Non-GAAP measures no material impact on our earnings. Accounting adjustments related to
Given the nature and purpose of our management reporting frame- the new financial instruments accounting standards are also excluded
work, we use certain non-GAAP financial measures, which are not from revenue as they give rise to volatility, primarily relating to unre-
defined nor do they have standardized meaning under GAAP. Hence alized gains and losses arising from fair valuing of the instruments
these reported amounts and related ratios are not necessarily compa- and are not viewed as a measure of economic performance. Global
rable with similar information reported by other financial institutions. Insurance results are excluded, as certain changes in revenue can be
largely offset in Insurance policyholder benefits, claims and acquisi-
2007 Defined operating leverage tion expense, which is not captured in our defined operating leverage
Our defined operating leverage refers to the difference between our calculation.
revenue growth rate (as adjusted) and non-interest expense growth The following table shows the defined operating leverage
rate (as adjusted). Revenue is presented on a taxable equivalent ratio calculation.
basis, while the impact of consolidated VIEs is excluded, as they have
Royal Bank of Canada: Annual Report 2007 55
Management’s Discussion and Analysis
2007 Defined operating leverage Table 18
(C$ millions, except percentage amounts) 2007 2006 Change
Total revenue $ 22,462 $ 20,637
Add: teb adjustment 332 213
Less: Revenue related to VIEs 31 (7)
Less: Global Insurance revenue 3,192 3,348
Less: Impact of the new financial instruments accounting standards (1) 83 –
Total revenue (adjusted) $ 19,488 $ 17,509 11.3%
Non-interest expense $ 12,473 $ 11,495
Less: Global Insurance-related non-interest expense 537 517
Non-interest expense (adjusted) $ 11,936 $ 10,978 8.7%
Defined operating leverage 2.6%
(1) Excludes the impact of the new financial instruments accounting standards related to Global Insurance.
Consolidated revenue and Insurance-related results excluding the The following table provides a reconciliation of consolidated
impact of the new financial instruments accounting standards and revenue, Global Insurance and Insurance-related results excluding
hurricane-related charges the impacts of the new financial instruments accounting standards and
In 2007 and 2006, there were certain items that impacted Total the hurricane-related charges.
consolidated revenue, Global Insurance and Insurance-related results.
Management believes that identifying and adjusting for these items
enhances the comparability of our results, and enables a more mean-
ingful comparison of our financial performance with certain other
financial institutions that make similar adjustments.
Consolidated revenue, Global Insurance and Insurance-related results excluding the noted items Table 19
October 31, 2007 October 31, 2006
Insurance Insurance Insurance Insurance
premiums, policyholder premiums, policyholder
Global investment benefits, claims Global investment benefits, claims
Consolidated Insurance and and acquisition Consolidated Insurance and and acquisition
(C$ millions) revenue (1) revenue (2) fee income (1) expense (1) revenue (1) revenue (2) fee income (1) expense (1)
GAAP reported amounts $ 22,462 $ 3,192 $ 3,152 $ 2,173 $ 20,637 $ 3,348 $ 3,348 $ 2,509
Exclude: Impact of the new financial
instruments accounting standards 77 160 160 154 – – – –
Hurricane-related charges – – – – – – – (61)
Amounts excluding the noted items $ 22,539 $ 3,352 $ 3,312 $ 2,327 $ 20,637 $ 3,348 $ 3,348 $ 2,448
(1) For further details, refer to the Financial performance section.
(2) For further details, refer to the Canadian Banking section.
56 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Canadian Banking
Canadian Banking comprises our domestic personal and business • We strengthened our leading market position in personal lending,
banking operations, certain retail investment businesses and our driven by 12% growth in residential mortgages.
global insurance operations. This segment includes Personal Financial • We continued to expand and upgrade our distribution network.
Services, Business Financial Services, Cards and Payment Solutions, We opened 30 bank branches and 12 insurance offices in Canada
and Global Insurance. during the year.
Canadian Banking provides a broad suite of financial products
and services to over 14 million individual and business clients through Economic and market review
our extensive branch, automated teller machine ( ATM ), online and In Canada, strong economic growth, in part reflecting solid consumer
telephone banking networks, as well as through a large number of pro- and business spending in the early part of the year, weakened mod-
prietary sales professionals in addition to a wide-ranging third-party erately in the latter part of the year, primarily due to slowing U.S.
network of independent insurance distributors. demand and a tightening of credit conditions as a result of the U.S.
We have top rankings in market share for most retail product subprime mortgage market concerns. Nonetheless, robust domestic
categories and are the largest Canadian bank-owned insurer. demand, largely underpinned by favourable labour market conditions,
solid business investment and continued strong Canadian housing
Highlights market activities, contributed to volume growth in all our businesses,
• We launched new and innovative products to better serve particularly in the home equity lending and retail investment busi-
our clients through the introduction of a new personal banking nesses. Competition in the personal deposits market remained strong
suite that includes several client-centric features, such as multi- from both traditional and niche financial institutions.
product rebates, and a new high-interest online savings account.
Canadian Banking financial highlights Table 20
(C$ millions, except number of and percentage amounts) 2007 2006 2005
Net interest income $ 6,353 $ 5,816 $ 5,233
Non-interest income 6,168 5,880 5,765
Total revenue $ 12,521 $ 11,696 $ 10,998
Non-interest expense 5,285 5,027 4,830
Provision for credit losses (PCL) 788 604 542
Insurance policyholder benefits, claims and acquisition expense 2,173 2,509 2,625
Net income before income taxes and non-controlling interest in subsidiaries $ 4,275 $ 3,556 $ 2,994
Net income $ 2,987 $ 2,426 $ 2,007
Key ratios
Return on equity (1) 34.3% 30.1% 26.3%
Return on risk capital (1) 45.5% 39.9% 36.3%
Net interest margin (2) 3.17% 3.22% 3.21%
Operating leverage (Banking-related operations) (3) 6.5% 4.4% 5.8%
Selected average balance sheet information (4)
Total assets (5) $ 220,000 $ 199,200 $ 181,100
Total earning assets (5) 200,400 180,500 163,200
Loans and acceptances (5) 200,000 179,700 160,700
Deposits 147,100 139,200 132,500
Attributed capital (1) 8,600 8,000 7,550
Risk capital (1) 6,500 6,050 5,450
Other information
Assets under administration $ 53,300 $ 44,600 $ 33,900
Number of employees (full-time equivalent) 25,813 24,828 23,794
Credit information
Gross impaired loans as a percentage of average net loans and acceptances .35% .33% .31%
Specific PCL as a percentage of average net loans and acceptances .39% .34% .34%
Banking-related operations (6)
Total revenue $ 9,329 $ 8,348 $ 7,687
Provision for credit losses 788 604 542
Non-interest expense 4,748 4,510 4,329
Net income 2,545 2,124 1,852
Global insurance
Total revenue $ 3,192 $ 3,348 $ 3,311
Insurance policyholder benefits, claims and acquisition expense 2,173 2,509 2,625
Non-interest expense 537 517 501
Net income 442 302 155
(1) Segment Return on equity, Average risk capital and Return on risk capital are key performance measures. Average attributed capital and Return on equity are calculated using methods
intended to approximate the average of the daily balances for the period. For further discussion, refer to the Key performance and non-GAAP measures section.
(2) Net interest margin (NIM) is calculated as Net interest income divided by Average total earning assets. Average total earning assets are calculated using methods intended to approxi-
mate the average earning asset balances for the period.
(3) Defined as the difference between revenue growth rate and non-interest expense growth rate for Banking-related operations.
(4) Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
(5) Total assets, Total earning assets, and Loans and acceptances include average securitized residential mortgage and credit card loans for the year of $19 billion and $4 billion, respectively
(2006 – $15 billion and $4 billion; 2005 – $11 billion and $4 billion).
(6) The banking-related operations of Canadian Banking comprise Personal Financial Services, Business Financial Services, and Cards and Payment Solutions.
Royal Bank of Canada: Annual Report 2007 57
Management’s Discussion and Analysis
to the reallocation of certain foreign investment capital this year,
Revenue by business line (C$ millions)
which was partially offset by lower income from this business as we
exited this business completely this year. A higher level of favourable
15,000
net actuarial liability adjustments and solid growth in our European
Cards and Payment Solutions
life reinsurance business also contributed to the increase. For a
12,000 Business Financial Services
detailed discussion regarding Insurance policyholder benefits, claims
9,000 Global Insurance and acquisition expense, refer to the Global Insurance business line
6,000
Personal Financial Services discussion.
3,000
2006 vs. 2005
0
Net income increased $419 million, or 21%, from 2005. The increase
2005 2006 2007
primarily reflected solid revenue growth in our banking businesses
and lower hurricane-related charges in 2006. These factors were
partially offset by increased costs in support of business growth and
Financial performance
higher provision for credit losses partly due to loan growth and lower
2007 vs. 2006
recoveries.
Net income increased $561 million, or 23%, from a year ago. The
increase primarily reflected strong growth across all our business
Banking-related operations
lines as well as a $326 million ($269 million after-tax) gain related to
Banking-related operations net income increased $272 million,
the Visa Inc. restructuring, partially offset by higher costs in support
or 15%, from 2005, largely reflecting solid revenue growth across
of business growth, increased provision for credit losses and higher
all business lines. The increase in net income was partly offset by
credit card customer loyalty reward program costs, reflecting a
increased costs in support of business growth and higher provision for
$121 million ($79 million after-tax) liability adjustment this year as
credit losses.
compared to $72 million ($47 million after-tax) in the prior year.
Total revenue increased $661 million, or 9%, from 2005. The
Our prior year results also included the hurricane-related charges,
increase was mainly due to strong volume growth across all business
and the receipt of a fee related to the termination of an agreement,
lines, and improved deposit and investment spreads, underpinned
whereas this year we included a favourable adjustment related to the
by our successful execution of growth initiatives and favourable eco-
reallocation of certain foreign investment capital.
nomic conditions.
Average assets increased $21 billion, or 10%, over the prior
Net interest margin increased 1 bp compared to 2005, primarily
year. The increase was largely attributable to strong loan growth,
reflecting improved spreads on deposits and investment products.
underpinned by our successful execution of growth initiatives, robust
Non-interest expense increased $181 million, or 4%, primarily
domestic demand and continued solid Canadian housing market
due to higher levels of sales and service personnel and infrastructure
activities. Average deposits were up $8 billion, or 6%, from a year ago,
costs in our distribution network and increased marketing costs in
mainly due to growth in business deposits reflecting high liquidity
support of business growth.
within Canadian businesses.
Provision for credit losses increased $62 million, or 11%, largely
reflecting higher provisions in our personal loan portfolio and lower
Banking-related operations
recoveries in our agriculture loan portfolio in 2006. In 2005, we included
Banking-related operations net income was up $421 million, or 20%,
our 50% proportionate share of a provision recorded at Moneris.
compared to the prior year. The increase was primarily due to solid
growth across all business lines and a gain related to the Visa Inc.
Global Insurance
restructuring. These factors were partially offset by higher costs in
Global Insurance net income increased $147 million compared to 2005,
support of business growth, increased provision for credit losses, the
largely reflecting a $142 million reduction in hurricane-related charges
receipt of a fee related to the termination of an agreement in the prior
in 2006. In addition, business growth associated with Canadian life
year, and higher credit card customer loyalty reward program costs
business and European life reinsurance business, as well as improved
this year.
claims experience in our Canadian property and casualty business
Total revenue was up $981 million, or 12%, over the prior year.
contributed to the increase. These factors were partially offset by lower
The increase was largely attributable to strong volume growth across
revenue from property catastrophe reinsurance business reflecting our
all business lines and the gain related to the Visa Inc. restructuring.
strategic reduction in exposure. For a detailed discussion regarding
These factors were partly offset by the receipt of a fee related to the
Insurance-related revenue and Insurance policyholder benefits, claims
termination of an agreement in the prior year and higher credit card
and acquisition expense, refer to the Financial performance section.
customer loyalty reward program costs this year.
Net interest margin decreased 5 bps from a year ago, primarily
2008 Outlook and priorities
reflecting the impact of changes in our product mix.
Canadian economic growth is expected to weaken in 2008 due to
Non-interest expense increased $238 million, or 5%, compared
tighter credit conditions, though credit growth should continue to be
to a year ago. The increase was largely attributable to higher costs
supported by rising domestic demand amid expanding labour markets
in support of business growth, including a 4% increase in sales and
and solid business investment. We will remain focused on new client
service personnel, or approximately 900 staff, and de novo branch
acquisition and growth in high-value markets, simplifying processes
expansion, as well as higher costs associated with system develop-
as well as augmenting our strengths in distribution capabilities,
ment, professional fees and sundry losses.
product breadth and integration, and client analytics to provide
Provision for credit losses increased $184 million, or 30%, from
superior client service.
last year, which had been at a cyclically low level, and has trended
up towards the historical average this year. The increase was mainly
Key strategic priorities for 2008
attributable to higher provisions in our business, credit card and per-
• Deliver a superior client experience to help clients achieve
sonal loan portfolios, reflecting higher loss rates and portfolio growth.
financial success, allowing us to retain and grow their business.
• Continue to improve our processes and revise our business
Global Insurance
models to make it easier for our clients to do business with us.
Global Insurance net income increased $140 million, or 46%, com-
• Focus on delivering relevant advice and solutions to attract new
pared to the prior year. The increase was primarily related to the
clients in specific markets, geographies and life stages.
property catastrophe reinsurance business, reflecting the hurricane-
related charges in the prior year, and a favourable adjustment related
58 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Business line review
Personal Financial Services
Personal Financial Services focuses on meeting the needs of our
Selected highlights Table 21
individual clients at every stage of their lives through a wide range
of lending and investment products and services, including home (C$ millions) 2007 2006 2005
equity financing, lines of credit, personal loans, savings and chequing Total revenue $ 5,082 $ 4,621 $ 4,181
accounts, guaranteed investment certificates (GICs), mutual funds and Other information
self-directed brokerage accounts. We have the largest retail banking Residential mortgages (1) 113,200 100,800 89,700
network in Canada with 1,146 branches and 3,946 ATMs. In addition, Personal loans (1) 38,700 34,600 30,500
Personal deposits (1) 35,500 33,600 32,900
we have more than 75 private bankers and 1,700 sales specialists. We
Personal GICs (1) 57,900 57,000 57,200
also rank first or second in market share for most personal banking Branch mutual fund balances 66,900 56,500 46,600
products. AUA – Self-directed brokerage 28,300 23,200 19,800
New accounts opened
Financial performance (thousands) (2) 1,066 769 740
Total revenue increased $461 million, or 10%, over the prior year. Number of:
The increase largely reflected strong volume growth in home equity Branches 1,146 1,117 1,104
Automated teller machines 3,946 3,847 3,906
lending and retail investments, and improved spreads across most
(1) Average amounts are calculated using methods intended to approximate the average
products. Higher mutual fund distribution fees, reflecting a 18%
of the daily balances for the period.
growth in mutual fund balances as a result of strong net sales and (2) Deposit accounts only.
capital appreciation also contributed to the increase.
Average residential mortgage balances and personal loans were
each up by 12% over the prior year, supported by relatively low inter- Average residential mortgages, personal loans and deposits
(C$ millions)
est rates in a historical context, strong labour market conditions and
continued solid Canadian housing market activities. Average personal
deposit balances increased 6% from a year ago, notwithstanding an 120,000 40,000 Residential mortgages
increasingly competitive market, in part driven by the success of our
96,000 32,000 Personal loans
recently launched high-interest online savings account.
72,000 24,000 Personal deposits
48,000 16,000
24,000 8,000
0 0
2005 2006 2007 2005 2006 2007
Business Financial Services
Business Financial Services offers a wide range of lending, leasing,
deposit, investment and transaction products and services to small Selected highlights Table 22
and medium-sized businesses, commercial, farming and agriculture (C$ millions) 2007 2006 2005
clients across Canada. We also provide trade-related products and Total revenue $ 2,301 $ 2,141 $ 2,011
services to Canadian and international clients to assist them in the Other information (average) (1)
conduct of their import and export operations domestically and Business loans (2) 36,900 34,400 31,700
around the globe. Our extensive business banking network includes Business deposits (3) 53,700 48,600 42,400
approximately 100 business banking centres and 2,000 business (1) Average amounts are calculated using methods intended to approximate the average
of the daily balances for the period.
account managers, and our strong commitment to our clients has
(2) Includes small business loans treated as retail and wholesale loans.
resulted in leading market share in business loans and deposits. (3) Includes GIC balances.
Financial performance
Total revenue increased $160 million, or 7%, over the prior year. The Average business loans and deposits (C$ millions)
increase was largely attributable to solid growth in business loans
and deposits, partially offset by lower spreads on deposits.
40,000 60,000 Business loans
Average business loans grew by 7% and average business
deposits increased 10%, primarily driven by continued solid business 32,000 48,000 Business deposits
spending and high liquidity within Canadian businesses. 24,000 36,000
16,000 24,000
8,000 12,000
0 0
2005 2006 2007 2005 2006 2007
Royal Bank of Canada: Annual Report 2007 59
Management’s Discussion and Analysis
Cards and Payment Solutions
Cards and Payment Solutions provides a wide array of convenient and
Selected highlights Table 23
customized credit cards and related payment products and solutions.
In addition, this business line includes our 50% interest in Moneris, (C$ millions) 2007 2006 2005
the merchant card processing joint venture with the Bank of Montreal. Total revenue $ 1,946 $ 1,586 $ 1,495
We have over 5 million credit card accounts and have an approxi- Other information
mately 20% market share of Canada’s credit card purchase volume. Average credit card balances (1) 11,200 9,900 8,800
Net purchase volumes 47,200 41,500 36,100
Financial performance (1) Average amounts are calculated using methods intended to approximate the average
Total revenue increased $360 million, or 23%, compared to the prior of the daily balances for the period.
year. The increase largely reflected a $326 million ($269 million after-
tax) gain related to the Visa Inc. restructuring. Continued solid growth
Average credit card balances and net purchase volumes (C$ millions)
in credit card balances and transaction volumes also contributed to
the increase. These factors were partially offset by the receipt of a fee
related to the termination of an agreement in the prior year, as well as 12,500 50,000 Average credit
higher credit card customer loyalty reward program costs this year. card balances
10,000 40,000
Net purchase
7,500 30,000 volumes
5,000 20,000
2,500 10,000
0 0
2005 2006 2007 2005 2006 2007
Global Insurance
Global Insurance offers a wide range of life, creditor, health, travel, home Non-interest expense was up $20 million, or 4%, from a year ago,
and auto insurance products and services to individual and business cli- primarily reflecting higher project-related spending and other costs in
ents in Canada and the U.S., as well as reinsurance for clients around the support of business growth.
world. These products and services are offered through a wide variety of Insurance policyholder benefits, claims and acquisition expense
distribution channels, including telephone, independent brokers, travel (PBCAE) decreased $336 million, or 13%, from the prior year.
agents, career sales force, Internet and retail insurance offices. Excluding the impact of the new financial instruments accounting
We are the largest Canadian bank-owned insurer, with products standards and the prior year hurricane-related charges, PBCAE
distributed through more than 17,000 independent brokers and more decreased $121 million, or 5%, over last year. The decrease was
than 650 career sales representatives in North America. Our Canadian largely attributable to the impact of lower U.S. annuity sales and a
insurance business holds lead positions in creditor, travel and individ- higher level of favourable net actuarial liability adjustments this year,
ual living benefits insurance products, and has a significant presence which included cumulative valuation adjustments of $92 million relat-
in life, home and auto insurance. We are a preferred provider of protec- ing to prior periods. These factors were partially offset by increased
tion, asset accumulation and retirement solutions in the U.S. costs commensurate with growth in our European life reinsurance and
Canadian businesses. For a reconciliation of PBCAE excluding the
Financial performance
Global Insurance net income increased $140 million, or 46%, com-
pared to the prior year. The increase was primarily related to the Selected highlights Table 24
property catastrophe reinsurance business, reflecting the hurricane- (C$ millions) 2007 2006 2005
related charges in the prior year, and a favourable adjustment related
Total revenue $ 3,192 $ 3,348 $ 3,311
to the reallocation of certain foreign investment capital this year, Non-interest expense 537 517 501
which was partially offset by lower income from this business as we Insurance policyholder benefits,
exited this business completely this year. A higher level of favourable claims and acquisition expense 2,173 2,509 2,625
net actuarial liability adjustments and solid growth in our European Net income 442 302 155
life reinsurance business also contributed to the increase. Other information
Total revenue decreased $156 million, or 5%, from a year ago. Gross insurance premiums
Excluding the impact of the new financial instruments accounting and deposits 3,460 3,406 3,288
Insurance claims and policy
standards, total revenue increased $4 million from the prior year.
benefit liabilities 7,283 7,337 7,117
The increase was largely attributable to growth in our European life
reinsurance and Canadian businesses, and a favourable adjustment
related to the reallocation of certain foreign investment capital this Gross insurance premiums and deposits (C$ millions)
year. These factors were largely offset by lower U.S. annuity sales
mainly due to lower long-term interest rates and lower revenue from
our property catastrophe reinsurance operations, which we exited 4,000
Gross insurance
completely this year. For a reconciliation of Global Insurance revenue 3,200 premiums and deposits
excluding the impact of the new financial instruments accounting stan-
2,400
dards, refer to the Key performance and non-GAAP measures section.
Gross insurance premiums and deposits were up $54 million, or 1,600
2%, primarily reflecting new sales growth and stronger client reten- 800
tion, partially offset by a decline in U.S. annuity sales.
0
2005 2006 2007
60 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
impact of the new financial instruments accounting standards, refer to reinsurance liabilities, net payments of claims related to hurricanes,
the Key performance and non-GAAP measures section. and a net decrease in life and health insurance liabilities reflecting
Insurance claims and policy benefit liabilities decreased $54 mil- changes to actuarial assumptions and model enhancements. These
lion, or 1%, over the prior year. The decrease primarily reflected the factors were largely offset by increased costs commensurate with
impact of a stronger Canadian dollar on the translated value of our business growth and the impact of the new financial instruments
U.S. dollar-denominated liabilities, lower property catastrophe accounting standards.
Wealth Management
Wealth Management comprises businesses that directly serve the • We led the Canadian mutual fund industry in net sales of long-
growing wealth management needs of affluent and high net worth term funds for the 16th consecutive calendar quarter.
clients in Canada, the U.S. and outside North America, and busi- • We continued to grow our U.S. full-service brokerage business
nesses that provide asset management and trust products through through the acquisition of J.B. Hanauer & Co. (J.B. Hanauer).
RBC and external partners. This segment comprises Canadian Wealth • We established international wealth management offices in sev-
Management, U.S. & International Wealth Management and Global eral cities, including Mexico City, Beijing and Santiago.
Asset Management.
Economic and market review
Highlights In 2007, economic growth was solid, underpinned by a relatively
• Wealth Management was created in February 2007 to focus on favourable interest rate environment, strong employment levels and
extending our leadership position in Canada and aggressively higher wages, and a solid yet moderating housing market, which
growing in the U.S. and international markets. contributed to increased demand for wealth management products.
• The fastest growing segment in Canadian wealth management The generally favourable capital market conditions during the year
continues to be high net worth clients (households with more continued to support the growth of our wealth management business.
than $1 million in investable assets). Economic growth weakened moderately in the latter part of the year
• Our Canadian full-service brokerage business was the first in mainly attributable to slowing U.S. demand, and a tightening of credit
the Canadian industry to surpass $150 billion in client assets conditions as a result of the U.S. subprime mortgage market concerns.
under administration.
Wealth Management financial highlights Table 25
(C$ millions, except number of and percentage amounts) 2007 2006 2005
Net interest income $ 427 $ 397 $ 374
Non-interest income
Fee-based revenue 2,109 1,745 1,458
Transactional and other revenue 1,456 1,345 1,319
Total revenue $ 3,992 $ 3,487 $ 3,151
Non-interest expense 2,902 2,613 2,440
Provision for credit losses (PCL) 1 1 2
Net income before income taxes and non-controlling interest in subsidiaries $ 1,089 $ 872 $ 708
Net income $ 762 $ 604 $ 502
Key ratios
Return on equity (1) 32.4% 27.8% 24.5%
Return on risk capital 65.1% 59.3% 54.8%
Pre-tax margin 27.3% 25.0% 22.5%
Selected average balance sheet information (2)
Total assets $ 16,600 $ 15,100 $ 13,200
Loans and acceptances 4,600 4,400 4,100
Deposits 24,900 22,100 20,700
Attributed capital (1) 2,300 2,150 2,050
Risk capital (1) 1,150 1,050 900
Other information
Revenue per advisor (000s) (3) $ 784 $ 694 $ 687
Assets under administration 488,500 476,500 380,700
Assets under management 161,200 142,800 118,500
Number of employees (full-time equivalent) 10,382 9,667 8,791
Number of advisors (3) 3,118 3,001 2,934
For the year ended
Impact of US$ translation on selected items 2007 vs. 2006
Reduced total revenue $ 61
Reduced non-interest expense 49
Reduced net income 9
Percentage change in average US$ equivalent of C$1.00 (4) 4%
(1) Segment Return on equity, Average risk capital and Return on risk capital are key performance measures. Average attributed capital and Return on equity are calculated using methods
intended to approximate the average of the daily balances for the period. For further discussion, refer to the Key performance and non-GAAP measures section.
(2) Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
(3) Includes investment advisors and financial consultants of our Canadian and U.S. full-service brokerage businesses.
(4) Average amounts are calculated using month-end spot rates for the year.
Royal Bank of Canada: Annual Report 2007 61
Management’s Discussion and Analysis
2006 vs. 2005
Revenue by business line (C$ millions)
Net income increased $102 million, or 20%, compared to 2005. The
increase primarily reflected strong earnings growth across all our busi-
4,000 ness lines and generally favourable market conditions. This increase
Global Asset Management
was partially offset by higher variable compensation due to higher
3,200 Canadian Wealth Management
commission-based revenue, higher staffing costs and increased costs
2,400 U.S. & International in support of business growth, including our acquisition of Abacus
Wealth Management
1,600 Financial Services Group Limited.
800
Total revenue increased $336 million, or 11%, compared to 2005,
largely due to strong growth in fee-based client assets reflecting new
0
2005 2006 2007
sales and capital appreciation, and the inclusion of our Abacus acqui-
sition. These factors were partially offset by lower client transaction
volumes in our brokerage businesses.
Financial performance Non-interest expense increased $173 million, or 7%, compared to
2007 vs. 2006 2005. The increase was primarily due to higher variable compensation
Net income for the year of $762 million increased $158 million, or commensurate with higher commission-based revenue, the inclusion
26%, from a year ago. The increase was largely due to strong earnings of our Abacus acquisition and higher staffing levels.
growth across all our business lines reflecting the ongoing suc-
cessful execution of our growth initiatives and generally favourable 2008 Outlook and priorities
market conditions. We recorded a $35 million ($28 million after-tax) The Canadian economic and business environment is expected to
foreign exchange translation gain on certain deposits in the current weaken slightly although business growth should continue to be sup-
year related to the implementation of the new financial instruments ported by generally favourable capital market conditions. In the U.S.,
accounting standards. we anticipate that financial market volatility will persist into early
Total revenue increased $505 million, or 14%, over the prior year, 2008, but economic growth will reaccelerate in the latter part of 2008.
largely due to strong growth in fee-based client assets across all busi- Growth in other global economies is expected to ease moderately in
ness lines, reflecting new sales, capital appreciation and the recruitment 2008. This economic environment and the successful execution of our
and retention of experienced advisors. A foreign exchange translation strategic priorities are anticipated to fuel our growth.
gain on certain deposits, the inclusion of our J.B. Hanauer acquisition,
solid loan and deposit growth in our international wealth management Key strategic priorities for 2008
business, and higher transactional volumes in our brokerage businesses • Continue extending our lead in the Canadian wealth and asset
reflecting generally favourable market conditions throughout the early management markets.
part of the year also contributed to the increase. These factors were • Pursue strong organic and acquisition growth in our U.S. wealth
partially offset by the negative impact of the stronger Canadian dollar on management businesses that serve individual clients and
the translated value of U.S. dollar-denominated revenue. advisors.
Non-interest expense was up $289 million, or 11%, mainly as a result • Continue expanding our high net worth international wealth
of higher variable compensation commensurate with higher commission- management business in select markets as well as through
based revenue, higher staffing levels and other costs in support of bolt-on acquisitions to complement our existing operations.
business growth, including our acquisition of J.B. Hanauer. These factors • Focus on expanding our asset management business globally,
were partially offset by the favourable impact of the stronger Canadian initially through acquisitions with a focus on U.S. opportunities.
dollar on the translated value of U.S. dollar-denominated expenses. • Work to continue attracting and retaining experienced advisors,
private bankers and other client-facing professionals across all
our businesses.
Business line review
Canadian Wealth Management
Canadian Wealth Management includes the market leader in
Selected highlights Table 26
full-service brokerage in Canada, with over 1,300 investment advi-
sors, providing advisor-based comprehensive financial solutions. (C$ millions) 2007 2006 2005
Additionally, we provide discretionary investment management Total revenue $ 1,460 $ 1,290 $ 1,164
and trust services to high net worth clients, offering a relationship Other information
approach for clients in need of sophisticated financial solutions. In Assets under administration 183,000 168,600 146,400
these businesses, there are more than 28 investment counsellors Assets under management 22,200 17,500 12,700
Total assets under fee-based
and 125 trust professionals in locations across the country. programs 83,300 70,200 56,500
Financial performance
Revenue increased $170 million, or 13%, over the prior year, mostly Average assets under administration and management (C$ millions)
due to strong growth in fee-based client assets reflecting higher
net sales, capital appreciation and the recruitment and retention of
experienced advisors. Higher transactional volumes in our brokerage 200,000 25,000 Assets under
business reflecting generally favourable market conditions also 160,000 20,000
administration
contributed to the increase. Assets under
120,000 15,000 management
80,000 10,000
40,000 5,000
0 0
2005 2006 2007 2005 2006 2007
62 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
U.S. & International Wealth Management
U.S. & International Wealth Management consists of our retail broker-
Selected highlights Table 27
age business, which is one of the largest full-service firms in the U.S.
with over 1,770 financial consultants. We also have a clearing and exe- (C$ millions) 2007 2006 2005
cution services business that serves small to mid-sized independent Total revenue $ 1,988 $ 1,732 $ 1,580
broker-dealers and institutions. Internationally, we provide custom- Other information
ized banking, credit, investment and trust solutions to high net worth Total loans, guarantees and
private clients through 2,300 employees across a network of 34 offices letters of credit (1), (2) 5,500 4,500 3,900
located in 20 countries around the world. Total deposits (1), (2) 17,900 15,100 13,900
Assets under administration 305,500 307,900 234,300
Assets under management 20,200 19,700 15,600
Financial performance Total assets under fee-based
Revenue increased $256 million, or 15%, over the prior year. In U.S. programs (3) 26,600 26,400 20,700
dollars, revenue increased $293 million, or 19%, largely as a result of Other information (US$ millions)
solid growth in fee-based client assets, higher transaction volumes Total revenue 1,826 1,533 1,305
in our U.S. brokerage business reflecting generally favourable mar- (1) Represents amounts related to our international wealth management businesses.
ket conditions throughout the early part of the year, and a foreign (2) Represents an average amount, which is calculated using methods intended to
approximate the average of the daily balances for the period.
exchange translation gain on certain deposits. The inclusion of our J.B. (3) Represents amounts related to our U.S. wealth management businesses.
Hanauer acquisition and solid loan and deposit growth in our interna-
tional wealth management business also contributed to the increase.
Average assets under administration and management (C$ millions)
350,000 25,000 Assets under
administration
280,000 20,000
Assets under
210,000 15,000 management
140,000 10,000
70,000 5,000
0 0
2005 2006 2007 2005 2006 2007
Global Asset Management
Global Asset Management is responsible for our proprietary asset
management business in Canada and the U.S. In Canada, we provide
Selected highlights Table 28
a broad range of investment management services through mutual (C$ millions) 2007 2006 2005
funds, pooled funds and separately managed portfolios. We distri- Total revenue $ 544 $ 465 $ 407
bute our investment solutions through a broad network of our bank Other information
branches, our discount and full-service brokers, independent advisors Canadian net long-term
and direct-to-consumer. We are the largest single fund company and mutual fund sales 6,200 5,400 5,600
one of the largest money managers in Canada. In the U.S., we provide Assets under management 118,800 105,600 90,200
investment services to both retail and institutional clients through
mutual funds, fee-based accounts and separately managed portfolios.
Average assets under management (C$ millions)
Financial performance
Revenue increased $79 million, or 17%, over the prior year, mainly
125,000
reflecting strong growth in Canadian assets under management due Assets under
100,000 management
to solid net long-term and money market mutual fund sales and
capital appreciation. 75,000
50,000
25,000
0
2005 2006 2007
Royal Bank of Canada: Annual Report 2007 63
Management’s Discussion and Analysis
U.S. & International Banking
U.S. & International Banking comprises our banking businesses • We added a real estate lending team to our Caribbean operations,
outside Canada, including our banking operations in the U.S. and giving us the expertise to better serve clients across the region.
Caribbean. In addition, this segment includes our 50% ownership in In addition, we formed a small business unit to serve this growing
RBC Dexia IS. client segment.
All of our businesses leverage the global resources of RBC , while
drawing upon the knowledge and expertise of our local profession- Economic and market review
als to deliver customized solutions to our clients. We differentiate The solid U.S. economic growth in the middle of the year, primarily
ourselves in each of our highly competitive marketplaces by tailoring supported by continued non-residential investment, strong export
solutions to meet our clients’ specific needs and building strong, long- growth and consumer spending, slowed in the latter part of the year.
lasting relationships by consistently delivering high-quality service. The weakening economic conditions largely reflected the ongoing
housing market correction, a tightening of credit conditions and
Highlights increased funding costs arising from the U.S. subprime mortgage mar-
• We continued to expand our banking footprint in key growth ket concerns. This resulted in a general weakening in credit quality of
areas in the U.S. Southeast through targeted acquisitions and residential real estate-related loans. Internationally, economic condi-
de novo branch openings. We acquired 39 AmSouth Bank tions in the Caribbean remained strong, although strong competition
branches (AmSouth branches) in Alabama and added 17 branches in the deposits market also tempered business growth. Solid economic
in Georgia when we acquired Flag Financial Corporation (Flag). conditions in Canada and the fast-growing asset management industry
• We realized a 12% (17% in Euros) growth in assets under in Europe continued to support our global custody business growth.
administration with RBC Dexia IS, underpinned by both new and
existing client growth.
U.S. & International Banking financial highlights Table 29
(C$ millions, except percentage amounts) 2007 2006 2005
Net interest income $ 1,031 $ 940 $ 923
Non-interest income 884 688 654
Total revenue $ 1,915 $ 1,628 $ 1,577
Non-interest expense 1,481 1,216 1,136
Provision for credit losses (PCL) 109 25 49
Net income before income taxes and non-controlling interest in subsidiaries $ 325 $ 387 $ 395
Net income $ 242 $ 261 $ 256
Key ratios
Return on equity (1) 6.9% 10.6% 10.8%
Return on risk capital (1) 11.7% 16.1% 16.4%
Selected average balance sheet and other information (2)
Total assets $ 39,700 $ 32,600 $ 25,900
Loans and acceptances 22,300 18,500 17,200
Deposits 34,200 28,700 21,200
Attributed capital (1) 3,350 2,400 2,350
Risk capital (1) 1,950 1,600 1,550
Other information
Assets under administration – RBC – – 1,361,100
Assets under administration – RBC Dexia IS (3) 2,713,100 2,421,100 –
Number of employees (full-time equivalent) 6,001 5,034 6,880
Credit information
Gross impaired loans as a percentage of average net loans and acceptances 1.91% 1.01% .94%
PCL as a percentage of average net loans and acceptances .49% .14% .28%
For the year ended
Impact of US$ and Euro translation on selected items 2007 vs. 2006
Reduced total revenue $ 8
Reduced non-interest expense 6
Increased net income 4
Percentage change in average US$ equivalent of C$1.00 (4) 4%
Percentage change in average Euro equivalent of C$1.00 (4) (5)%
(1) Segment Return on equity, Average risk capital and Return on risk capital are key performance measures. Average attributed capital and Return on equity are calculated using methods
intended to approximate the average of the daily balances for the period. For further discussion, refer to the Key performance and non-GAAP measures section.
(2) Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
(3) AUA – RBC Dexia IS represents the total AUA of the joint venture as at September 30, 2007. We have revised the 2006 amount to reflect the amount reported by RBC Dexia IS, as we had
previously disclosed only the assets under custody amount related to our joint venture.
(4) Average amounts are calculated using month-end spot rates for the year.
64 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
2006 vs. 2005
Revenue by business line (C$ millions)
Net income increased $5 million, or 2%, from 2005, largely reflecting
solid growth and improved credit quality in Banking, partially offset by
2,000 transaction expenses related to the transfer of Institutional & Investor
RBC Dexia Investor Services
Services to RBC Dexia IS.
1,600 Banking
Total revenue increased $51 million, or 3%, from 2005, primar-
1,200
ily reflecting strong revenue growth in RBC Dexia IS due to increased
800 business volume. The increase was partially offset by lower Banking
400 revenue due to the negative impact of a stronger Canadian dollar on the
0 translated value of U.S. dollar-denominated revenue. In U.S. dollars,
2005 2006 2007 Banking revenue increased $58 million, or 7%, reflecting solid loan and
deposit growth and higher fee-based activities.
Non-interest expense was up $80 million, or 7%, from 2005,
Financial performance primarily reflecting transaction expenses related to the transfer of IIS
2007 vs. 2006 to RBC Dexia IS, as well as higher project-related spending and other
Net income decreased $19 million, or 7%, from the prior year. The costs in support of business growth.
decrease was largely attributable to increased provision for credit Provision for credit losses decreased $24 million, or 49%,
losses, primarily reflecting higher impaired loans in our U.S. residential compared to 2005, primarily reflecting strong credit quality in our
builder finance business. This was partially offset by strong business U.S. banking loan portfolio in 2006.
growth in RBC Dexia IS, as well as higher loan and deposit growth in
the U.S. reflecting the inclusion of our acquisitions of Flag and the 2008 Outlook and priorities
AmSouth branches, de novo branch openings and business expan- We continue to see significant opportunities in the U.S. and Caribbean
sion. Our results also reflected higher costs in support of business to expand our Banking business, through a combination of organic
growth and a loss on the restructuring of our U.S. banking investment growth and strategic acquisitions. We anticipate that the current
portfolio this year. financial market volatility in the U.S. will persist into early 2008, as
Total revenue increased $287 million, or 18%, from the prior year. investors and lenders will remain cautious and risk averse amid the
The increase was primarily attributable to RBC Dexia IS, reflecting continued correction in the U.S. housing market. The anticipated
strong market activity, an additional month of results and business improved U.S. economic conditions in the latter part of 2008, primarily
growth. Banking revenue was also up largely due to loan and deposit underpinned by rising business investment, strong export growth and
growth, mainly reflecting the inclusion of Flag and the AmSouth continued consumer spending against a backdrop of the abatement of
branches, despite the negative impact of a stronger Canadian dollar on current financial market volatility and the housing market correction,
the translated value of U.S. dollar-denominated revenue. These factors should support business and revenue growth. The projected solid
were partially offset by a loss on the restructuring of our U.S. banking economic growth in Canada and the Eurozone, as well as the increas-
investment portfolio this year. ing trend of outsourcing by fund managers in Canada, the Eurozone
Non-interest expense was up $265 million, or 22%, over the prior and Asia should continue to support RBC Dexia IS business growth.
year, largely reflecting higher costs in support of business growth.
The increase primarily reflected higher processing and staff costs at Key strategic priorities for 2008
RBC Dexia IS commensurate with business growth, the inclusion of • Continue implementing our long-term strategy to become the
our acquisitions of Flag and the AmSouth branches and the related pre-eminent bank for businesses, business owners and profes-
integration costs, and U.S. de novo branch openings. Higher costs sionals in the U.S. Southeast.
associated with an additional month of results relating to RBC Dexia IS, • Efficiently integrate the pending acquisition of Alabama National
as well as an increase in sales and service personnel in our banking BanCorporation for our U.S. banking operations, while retaining
branch network also contributed to the increase. and growing our client base through continuous enhancement of
Provision for credit losses was up $84 million, largely due to our products and services and distribution network.
higher impaired loans in our U.S. residential builder finance business, • Build on our strong position in the Caribbean to create the lead-
reflecting the downturn in the U.S. housing market in the latter part of ing bank in the region through the efficient integration of RBTT
the year. As at October 31, 2007, we had $2.8 billion in our U.S. resi- Financial Group, which we recently announced our intention to
dential builder finance loans outstanding. acquire, subject to closing conditions.
• Pursue growth strategies with RBC Dexia IS that focus on
strengthening the global client franchise, broadening its suite of
products through innovation and expanding its presence in high-
growth markets.
Royal Bank of Canada: Annual Report 2007 65
Management’s Discussion and Analysis
Business line review
Banking
Banking consists of our banking operations in the U.S. and Caribbean.
Selected highlights Table 30
These businesses offer a broad range of banking products and ser-
vices to personal and business clients in their respective markets, 2007 2006 2005
including residential construction finance services. Our U.S. banking Total revenue (C$ millions) $ 1,156 $ 1,070 $ 1,077
business ranks 5th in deposit market share in North Carolina and Other information (US$ millions)
among the top 15 in its U.S. Southeast banking footprint. It has a Total revenue $ 1,059 $ 945 $ 887
network of 350 branches and 395 ATMs. Caribbean banking ranks in Net interest margin (1) 3.56% 3.73% 3.70%
Average loans and
the top three in deposit market share in most of its markets and has
acceptances (2), (3) $ 17,800 $ 15,100 $ 14,200
44 branches and 78 ATMs. Average deposits (2), (3) 17,700 15,900 15,500
Number of:
Financial performance Branches 394 325 315
Total revenue increased $86 million, or 8%, compared to the prior Automated teller machines 473 385 371
year, despite the negative impact of a stronger Canadian dollar on the (1) Net interest margin (NIM) is calculated as Net interest income divided by Average
translated value of U.S. dollar-denominated revenue. In U.S. dollars, total earning assets. Average total earning assets are calculated using methods
intended to approximate the average of the daily balances for the period.
Banking revenue increased $114 million, or 12%, primarily driven by (2) Average amounts are calculated using methods intended to approximate the average
solid loan and deposit growth, reflecting the inclusion of Flag and the of the daily balances for the period.
(3) Average loans and acceptances and Average deposits have been adjusted for 2005 for
AmSouth branches, the 10 U.S. de novo branch openings since last netting of a large Caribbean government account effective the fourth quarter of 2005,
year and business growth. These factors were partially offset by a which reduced loan and deposit balances by a similar amount.
loss on the restructuring of our U.S. banking investment portfolio. Net
interest margin was down 16 bps, largely due to continued competitive
Average loans and deposits (US$ millions)
pressure on deposit business, the reversal of accrued interest related
to higher impaired loans this year, and a loss on the early redemption of
trust preferred notes due to the impact of changes in our portfolio mix. 20,000 20,000 Loans and acceptances
In U.S. dollars, average loans and acceptances and deposits were
16,000 16,000 Deposits
up $3 billion (18%) and $2 billion (11%), respectively, from the prior
12,000 12,000
year. The increase was primarily attributable to growth in loans and
acceptances, and deposits in our U.S. banking operations of 18% and 8,000 8,000
12%, respectively, reflecting our acquisitions of Flag and the AmSouth 4,000 4,000
branches, de novo branch openings and business growth. Growth in 0 0
loans and acceptances, and deposits in our Caribbean banking opera- 2005 2006 2007 2005 2006 2007
tions of 14% and 8%, respectively, reflecting our continued focus on
enhancing sales management and client satisfaction, also contributed
to the increase.
RBC Dexia Investor Services
Our joint venture, RBC Dexia IS, offers an integrated suite of institu-
Selected highlights Table 31
tional investor products and services, including global custody, fund
and pension administration, securities lending, shareholder services, (C$ millions) 2007 2006 2005
analytics and other related services, to institutional investors world- Total revenue (1) $ 759 $ 558 $ 500
wide. RBC Dexia IS was created on January 2, 2006, when we combined Other information
our Institutional & Investor Services (IIS) business with Luxembourg- Assets under administration
based Dexia Funds Services in return for a 50% joint venture interest RBC (2) – – 1,361,100
in RBC Dexia IS. RBC Dexia IS (3) 2,713,100 2,421,100 –
(1) Given the similarities between the IIS and RBC Dexia IS businesses, we have disclosed
the revenue from our prior IIS business and our 50% proportionate ownership of RBC
Financial performance Dexia IS on the same line for comparative purposes. Revenue presented for 2006 rep-
Total revenue was up $201 million, or 36%, compared to the prior year. resents two months of revenue from our IIS business earned between November 1,
2005, and the creation of RBC Dexia IS on January 2, 2006. The current period revenue
The increase primarily reflected growth in our custodian and securities also includes our proportionate share of RBC Dexia IS for the twelve months ended
lending business on strong market activity, as well as organic growth September 30, 2007, as RBC Dexia IS reports on a one month lag.
(2) AUA – RBC represents total Assets under administration (AUA) of our IIS business.
from existing clients and the acquisition of new clients. An additional IIS AUA of $1,400 billion was contributed to RBC Dexia IS in exchange for our 50%
month of results reported in the year also contributed to the increase. ownership interest.
(3) AUA – RBC Dexia IS represents the total AUA of the joint venture as at September 30,
Assets under administration were up 12% from a year ago. The
2007. We have revised the 2006 amount to reflect the amount reported by RBC Dexia
increase was largely attributable to the acquisition of new clients, IS, as we had previously disclosed only the assets under custody amount related to
largely driven by an increase in sales as a result of our broadened our joint venture.
product and service offerings, organic growth from existing customers
and market appreciation.
66 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Capital Markets
Capital Markets comprises our global wholesale banking business, Highlights
which provides a wide range of corporate and investment banking, sales • We completed three acquisitions to access new clients and build
and trading, research and related products and services to corporations, on our capabilities: Carlin Financial Group, a U.S. broker-dealer
public sector and institutional clients in North America and specialized known for its proprietary trade execution platform; Daniels &
products and services in select global markets. This segment consists Associates, L.P., a U.S. merger and acquisition advisory firm; and
of two main businesses, Global Markets and Global Investment Banking Seasongood & Mayer, LLC, a U.S. public finance firm and munici-
and Equity Markets. All other businesses are grouped under Other. pal debt underwriter.
We have an established reputation as a premier Canadian invest- • In 2007, we led or jointly led many significant debt and equity new
ment bank with top-tier market share in virtually all lines of wholesale issuance transactions totalling $184 billion.
business in Canada. We offer a full suite of products and service • We were involved in the top five merger and acquisitions
capabilities and have long-standing and deep relationships with our transactions with Canadian involvement through the first three
clients. We have a select but diversified set of global capabilities which calendar quarters of 2007.
includes fixed income, equity, foreign exchange, structured products, • We were named Dealmaker of the Year in Canada for four of the
global infrastructure finance, and energy and mining. last five years (Financial Post) and the Best Investment Bank in
We remain committed to our businesses and will maintain our Canada (Financial Post and Global Finance magazine).
focus on being the undisputed leader in Canada, a top-tier leader in
the U.S. mid-market, a global structurer and trader, and a leading
global fixed income bank.
Capital Markets financial highlights Table 32
(C$ millions, except number of and percentage amounts) 2007 2006 2005
Net interest income (1) $ 453 $ 131 $ 557
Non-interest income 3,936 4,005 3,005
Total revenue (1) $ 4,389 $ 4,136 $ 3,562
Non-interest expense 2,769 2,603 2,890
Provision for (recovery of) credit losses ( PCL) (22) (115) (91)
Net income before income taxes and non-controlling interest in subsidiaries (1) $ 1,642 $ 1,649 $ 762
Net income $ 1,292 $ 1,355 $ 686
Key ratios
Return on equity (2) 26.6% 31.5% 17.5%
Return on risk capital (2) 32.5% 38.7% 22.4%
Selected average balance sheet information (3)
Total assets $ 311,200 $ 260,600 $ 229,100
Trading securities 152,900 132,300 109,600
Loans and acceptances 29,000 22,100 17,600
Deposits 125,700 108,100 96,500
Attributed capital (2) 4,800 4,250 3,850
Risk capital (2) 3,900 3,450 3,050
Other information
Number of employees (full-time equivalent) 3,364 2,936 2,762
Credit information
Gross impaired loans as a percentage of average net loans and acceptances .06% .28% .67%
Specific PCL as a percentage of average net loans and acceptances (.08)% (.52)% (.52)%
For the year ended
Impact of US$ and British pound translation on selected items (1) 2007 vs. 2006
Reduced total revenue (1) $ 70
Reduced non-interest expense 15
Reduced net income 30
Percentage change in average US$ equivalent of C$1.00 (4) 4%
Percentage change in average British pound equivalent of C$1.00 (4) (5)%
(1) Taxable equivalent basis. For further discussion, refer to the How we measure and report our business segments section.
(2) Segment Return on equity, Average risk capital and Return on risk capital are key performance measures. Average attributed capital and Return on equity are calculated using methods
intended to approximate the average of the daily balances for the period. For further discussion, refer to the Key performance and non-GAAP measures section.
(3) Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
(4) Average amounts are calculated using month-end spot rates for the year.
Revenue (1) by business line (C$ millions) Revenue (1) by geography (C$ millions)
5,000 Other 5,000 Other
4,000 GIBEM 4,000 Europe
3,000 Global Markets 3,000 U.S.
2,000 2,000 Canada
1,000 1,000
0 0
2005 2006 2007 2005 2006 2007
(1) Taxable equivalent basis. For further discussion, refer to the How we measure and report our business segments section.
Royal Bank of Canada: Annual Report 2007 67
Management’s Discussion and Analysis
Economic and market review Loans and acceptances increased $7 billion, or 31%, mainly related to
Capital markets were generally favourable for the first part of 2007; strong investment banking activity and growth in our Infrastructure
however, a sudden and deep deterioration in the U.S. subprime resi- Finance business. Deposits increased $18 billion, or 16%, primarily
dential mortgage-backed securities (RMBS) market in the latter part due to increased funding requirements of our trading businesses.
of 2007 had negative effects on the broader credit markets. This was Credit quality remained strong as gross impaired loans decreased
characterized by significant credit spread widening, increased volatil- $43 million, or 72%, from a year ago.
ity in global equities, the credit rating agency downgrades of a broad
group of collateralized debt obligations of asset-backed securities 2006 vs. 2005
(CDOs of ABS) and U.S. RMBS instruments and a general lack of liquid- Net income increased $669 million, or 98%, compared to 2005
ity across a broad range of products including securities with strong primarily due to the prior year Enron litigation-related provision of
credit ratings. The severe disruption in financial markets contributed $591 million ($326 million after-tax). Also contributing to the increase
to substantial writedowns and negatively impacted the effective- were record trading results, a lower effective income tax rate and near
ness of hedging strategies for certain credit related products. Global record M&A fees. These factors were partly offset by higher variable
central banks continued to provide liquidity to financial markets in an compensation on improved business performance and the negative
effort to minimize the impact of the market dislocation on the broader impact of a stronger Canadian dollar on the translated value of our
economy, including a 75 bps aggressive reduction in its overnight bor- U.S. dollar- and British pound-denominated earnings.
rowing rate by the U.S. Federal Reserve during the fourth quarter of Total revenue increased $574 million, or 16%. The increase was
2007. Lower levels of liquidity coupled with increased financial market primarily due to record trading results on improved market conditions
volatility contributed to lower levels of origination activity compared and growth in certain equity trading strategies and stronger M&A activ-
to 2006. M&A activity remained strong for most of the year. The stron- ity. Higher distributions and gains from private equity investments,
ger Canadian dollar negatively impacted the translated value of our increased brokerage commissions and increased credit fees related
U.S. dollar-denominated earnings. to investment banking activity also contributed to the increase. These
factors were partially offset by a decline in equity origination in Canada
Financial performance mainly reflecting uncertainty in equity markets outside the resource sec-
2007 vs. 2006 tor. Debt origination fees were also down, mainly in the U.S., due to the
Net income decreased $63 million, or 5%, compared to a year ago rising interest rate environment and further weakening of the U.S. dollar.
largely due to writedowns recorded in the current year totalling Non-interest expense decreased $287 million, or 10%, largely
$357 million on the valuation of U.S. subprime RMBS and CDOs of ABS reflecting the Enron litigation-related provision recorded in 2005 and
in our Structured Credit business. The writedowns reflected the dete- the favourable reduction in the translated value of U.S. dollar- and
rioration in the credit markets in the latter part of 2007 as a result of British pound-denominated expenses due to the stronger Canadian
concerns over the U.S. subprime market, a general lack of liquidity and dollar. Higher variable compensation on stronger business perfor-
the recent credit rating agency downgrades of a broad group of CDOs mance and higher spending in support of business growth initiatives
of ABS and U.S. RMBS instruments. The negative impact of the stron- partly offset the decrease.
ger Canadian dollar on the translated value of U.S. dollar-denominated Recovery of credit losses of $115 million in 2006, including a
earnings also contributed to the decrease. These factors were partially $50 million reversal of the general allowance, compared to a recovery
offset by broad-based revenue growth in many other businesses. The of credit losses of $91 million in 2005.
writedowns of $357 million were offset by a $119 million compensa-
tion adjustment and $78 million income tax adjustment for a net 2008 Outlook and priorities
impact of $160 million. Credit market and liquidity concerns should abate as capital markets
Total revenue increased $253 million, or 6%. The increase was pri- stabilize globally and gradually return to more normal levels of activity.
marily due to increased equity derivatives and foreign exchange trading The expected gradual improvement in market conditions should result
revenue, strong equity origination activity across all geographies and in the recovery of underperforming businesses. In Canada, we will con-
the inclusion of our recent acquisitions. Higher M&A activity, mainly in tinue to build on our leadership position, while in the U.S. we remain
the U.S. gains associated with credit derivative contracts used to focused on leveraging the strengths of recent acquisitions continuing
economically hedge our core lending portfolio reflecting the widening to build our mid-market franchise and expanding into new sectors.
of credit spreads, and higher distributions on private equity invest- Internationally, we will strategically expand our global capabilities,
ments also contributed to the increase. These factors were partially including strengthening our Infrastructure Finance business and
offset by lower trading revenue in our fixed income businesses reflect- expanding the distribution of structured and fixed income products into
ing the writedowns on the valuation of U.S. subprime RMBS and CDOs Asian markets. Our deal pipeline should remain fairly healthy and is
of ABS, the negative impact of the stronger Canadian dollar on the expected to continue to grow; however, conversion remains a concern.
translated value of U.S. dollar-denominated revenue and lower U.S.
debt origination results due in part to the tightening of credit markets in Key strategic priorities for 2008
the latter part of 2007. • Maintain our leadership position in Canada and deepen our
Non-interest expense increased $166 million, or 6%, primarily penetration in the Canadian mid-market segment.
reflecting increased costs in support of business growth, including • Continue to grow our Municipal Products business with the
higher staffing levels and the inclusion of our recent acquisitions. recently acquired platform of Seasongood & Mayer, expand our
These factors were partially offset by lower variable compensation banking activities geographically and develop new product seg-
commensurate with weaker results and lower professional fees. ments in the U.S.
Recovery of credit losses of $22 million in the current year com- • Continue to expand the distribution of structured and fixed
pares to a recovery of credit losses of $115 million in the prior year, income products into Asian markets.
which included a $50 million reversal of the general allowance. • Continue to expand our infrastructure and project finance
Average assets were up $51 billion, or 19%, mainly due to product offering from U.K. to other international and U.S. markets.
increased trading securities primarily resulting from growth in certain • Continue to build our global energy capabilities, an area of
equity trading strategies and in our fixed income trading businesses. strength for us.
68 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Business line review
Global Markets
Global Markets is our centre for origination, trading and distribution of
Selected highlights Table 33
predominantly investment-grade fixed income, foreign exchange and
derivative products. It also conducts our proprietary trading opera- (C$ millions) 2007 2006 2005
tions, alternative asset and private equity businesses. Total revenue (1) $ 2,455 $ 2,579 $ 2,256
Other information
Financial performance Trading-related 2,060 2,154 1,706
Global Markets revenue decreased $124 million, or 5%, from a year Other (2) 395 425 550
ago. Trading-related revenue was down $94 million, or 4%, primarily (1) Taxable equivalent basis. For further discussion, refer to the How we measure and
report our business segments section.
due to lower trading revenue in certain fixed income business as a (2) Other includes debt origination, municipal products, gains/losses on private equity
result of writedowns totalling $357 million on the valuation of U.S. sub- instruments, derivatives non-trading and securitization revenue.
prime RMBS and CDOs of ABS in our Structured Credit business. This
was partially offset by higher equity derivatives and foreign exchange
trading revenue due to business expansion and increased market vola- Trading-related and Other revenue (C$ millions)
tility. Other revenue was down $30 million from a year ago largely due
to lower private equity investment gains.
3,000 Other
We led or jointly led 1,005 debt issues, up from 615 deals
a year ago, with a total value of approximately $164 billion, and in 2,400 Trading-related
Municipal Finance, we were involved in 779 issues with a total value 1,800
of US$81 billion through October 2007. 1,200
600
0
2005 2006 2007
Global Investment Banking and Equity Markets
Global Investment Banking and Equity Markets brings together our
Selected highlights Table 34
investment banking and equity sales and trading capabilities to
provide a complete suite of advisory and equity-related services to (C$ millions) 2007 2006 2005
clients from origination, structuring and advising to distribution, sales Total revenue (1) $ 1,675 $ 1,382 $ 1,098
and trading. Other information
Given the significant growth in our National Clients business, we Gross underwriting and
transferred this business from Other to Global Investment Banking advisory fees 831 665 598
and Equity Markets in the second quarter of 2007. Equity sales and trading 375 283 252
Other (2) 469 434 248
(1) Taxable equivalent basis. For further discussion, refer to the How we measure and
Financial performance
report our business segments section.
Global Investment Banking and Equity Markets revenue increased (2) Other includes increases in private equity distributions, growth in revenue
$293 million, or 21%, compared to the prior year. Gross underwriting associated with our core lending portfolio and syndicated finance and the gain on the
exchange of our NYSE seats for NYX shares.
and advisory revenue was up $166 million, or 25%, largely reflecting
strong equity origination activity across all geographies and improved
M&A activity mainly in the U.S. Equity sales and trading revenue Gross underwriting and advisory fees, equity sales and trading,
increased $92 million, or 33%, mainly due to the inclusion of our and Other revenue (C$ millions)
recent acquisitions, while Other revenue was up $35 million, or 8%,
primarily reflecting higher private equity distributions and increased 2,000 Equity sales and trading
lending activity. 1,600 Other
In 2007, we advised on 98 announced M&A deals with a total
1,200 Gross underwriting and
value of $190 billion. In 2007, we led or co-led 142 equity and advisory fees
equity-related new issues with a total market value of $20 billion, 800
up from 82 in the prior year. 400
0
2005 2006 2007
Royal Bank of Canada: Annual Report 2007 69
Management’s Discussion and Analysis
Other
Other consists of our remaining businesses including our Global Credit Financial performance
business, which oversees the management of our core lending port- Revenue from Other was $259 million, an increase of $84 million, or
folios and manages our non-strategic lending portfolio. Global Credit 48%, over the prior year. The increase mainly reflected gains associ-
also includes our Global Financial Institutions business which delivers ated with credit derivative contracts used to economically hedge our
innovative and creative solutions to global financial institutions includ- core lending portfolio reflecting the widening of credit spreads and
ing correspondent banking, treasury and cash management services. increased revenue in our Global Financial Institutions business due to
Research offers economic and securities research products to institu- higher deposit balances.
tional clients in Canada and globally.
Corporate Support
Corporate Support segment activities include our global technology adjustments including the elimination of the teb adjustments recorded
and operations group, corporate treasury, finance, human resources, in Capital Markets related to the gross-up of income from Canadian
risk management, internal audit and other global functions, the costs taxable corporate dividends to their taxable equivalent value. These
of which are largely allocated to the business segments. adjustments are recorded in net interest income and offset in the
The reported results for the Corporate Support segment mainly provision for income taxes.
reflect activities that are undertaken for the benefit of the organiza- Due to the nature of activities and consolidated adjustments
tion, and which are not allocated to the business segments such as reported in this segment, we believe that a year-over-year trend analy-
enterprise funding, securitization and the net charges associated sis is not relevant. The following identifies the material items affecting
with unattributed capital. The results also include consolidation the reported results in each year.
Corporate Support financial highlights Table 35
(C$ millions) 2007 2006 2005
Net interest income (1) $ (732) $ (488) $ (294)
Non-interest income 377 178 190
Total revenue (1) $ (355) $ (310) $ (104)
Non-interest expense 36 36 61
Recovery of credit losses (85) (86) (47)
Business realignment charges – – 39
Net loss before income taxes and non-controlling interest in subsidiaries (1) $ (306) $ (260) $ (157)
Net income (loss) $ 209 $ 111 $ (14)
Selected average balance sheet and other information (2)
Total assets $ (6,500) $ (5,400) $ (4,000)
Attributed capital (3) 2,950 3,100 2,800
Securitization
Total securitizations sold and outstanding (4) $ 17,889 $ 15,836 $ 11,587
New securitization activity in the year (5) 4,264 6,142 3,821
Other information
Number of employees (full-time equivalent) 19,485 18,393 17,785
(1) Taxable equivalent basis. For further discussion, refer to the How we manage and report our business segments section. These amounts included the elimination of the adjustment
related to the gross-up of income from Canadian corporate dividends of $332 million in 2007 recorded in Capital Markets (2006 – $213 million, 2005 – $109 million).
(2) Average amounts are calculated using methods intended to approximate the average of the daily balances for the period.
(3) For further discussion, refer to the Key performance and non-GAAP measures section.
(4) Total securitizations sold and outstanding comprises credit card loans and residential mortgages.
(5) New securitization activity comprises residential mortgages and credit card loans securitized and sold in the year. For further details, refer to Note 5 to our Consolidated Financial
Statements.
2007 and the favourable resolution of income tax audits related to prior
Net income of $209 million for the year included income tax amounts years not allocated to the business segments. Mark-to-market gains
largely related to enterprise funding activities that were not allocated on derivatives related to certain economic hedges also contributed to
to the business segments and favourable income tax settlements net income in the year. These factors were partially offset by the timing
related to prior years. These factors were partially offset by the of securitization activity and an amount accrued related to a leased
mark-to-market losses mainly related to the recognition of the inef- space which we will not occupy and expect to sublease at a rate lower
fectiveness of hedged items and the related derivatives in hedge than our contracted rate.
accounting relationships, a cumulative adjustment for losses result-
ing from the fair valuing of certain derivatives that did not qualify for 2005
hedge accounting and higher capital taxes that were not allocated to Net loss of $14 million largely reflected business realignment charges
the business segments. of $39 million, and mark-to-market losses on derivatives relating to
certain economic hedges, which were partially offset by securitization
2006 activity and interest refunds relating to the resolution of disputed tax
Net income of $111 million for the year mainly reflected income tax items for the 1993 to 1998 tax periods.
amounts which were largely related to enterprise funding activities
70 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Financial condition
Balance sheet Table 36
As at October 31
(C$ millions) 2007 2006
Interest-bearing deposits with banks $ 11,881 $ 10,502
Securities 178,255 184,869
Assets purchased under reverse repurchase agreements and securities borrowed 64,313 59,378
Loans 239,429 209,939
Other assets 103,735 69,100
Total assets 600,346 536,780
Deposits 365,205 343,523
Other liabilities 201,284 160,575
Non-controlling interest in subsidiaries 1,483 1,775
Shareholders’ equity 24,439 22,123
With the adoption of the new financial instruments accounting stan- past 12 months) and personal loans, largely driven by demand for
dards, certain financial instruments are now measured at fair value home equity lending amid continued strong Canadian housing market
that were previously reported at cost or amortized cost. As a result, a activities, relatively low interest rates in a historical context and strong
greater portion of our Consolidated Balance Sheet is now measured at labour market conditions. Solid growth in our wholesale loans of
fair value, including certain derivative instruments. For further details, $11 billion, or 19%, mainly reflecting continued growth in corporate
refer to the Critical accounting policies and estimates section as well lending also contributed to the increase.
as Notes 1 and 2 to our Consolidated Financial Statements. Other assets were up $35 billion, or 50%. The growth was mainly
attributable to an increase in derivative-related amounts primarily
2007 vs. 2006 in foreign exchange and interest rate contracts, reflecting increased
Total assets were up $64 billion, or 12%, from a year ago, driven by volatility, strong shifts in exchange rates and interest rates, as well as
growth across most asset categories. The increase was largely attrib- higher client and trading activity. These factors were partially offset by
utable to solid loan growth, including Canadian residential mortgages the impact of a stronger Canadian dollar on the translated value of U.S.
and personal and business loans, amid generally favourable domes- dollar-denominated derivative-related assets.
tic market conditions. Higher balances related to derivative-related Deposits increased $22 billion, or 6%, from a year ago. The
amounts, primarily reflecting changes in market conditions, also con- growth was largely due to increased business and government depos-
tributed to the increase. its mainly reflecting higher balances in support of business activities,
Interest-bearing deposits with banks increased $1 billion, or increased balances at RBC Dexia IS, and domestic business growth.
13%, from the prior year, largely reflecting a shift in our portfolio mix Higher personal deposits in part driven by the success of our recently
to higher-yielding assets. launched high-interest online savings account also contributed to the
Securities were down $7 billion, or 4%, from a year ago, primarily increase. These factors were partially offset by a reduction in interest-
due to a strategic reduction in our positions taking into account recent bearing deposits with banks in part reflecting our lower funding
financial market volatility, and the impact of a stronger Canadian dollar requirements compared to a year ago.
on the translated value of U.S. dollar-denominated securities. Other liabilities rose $41 billion, or 25%, from last year. The
Assets purchased under reverse repurchase agreements and increase was mainly due to derivative-related amounts, primarily
securities borrowed increased $5 billion, or 8%, from a year ago. This reflecting the same factors noted above in derivative-related assets.
growth primarily reflected higher balances in support of our equity and Increased securities sold short, mainly reflecting business growth and
fixed income trading strategies. higher balance in support of our fixed income trading strategies, also
Loans increased $29 billion, or 14%, from a year ago, reflecting contributed to the increase.
increases across all categories. The largest growth was attributable to Shareholders’ equity increased $2 billion, or 10%, over the prior
Canadian residential mortgages, which increased $13 billion, or 14% year. The growth largely reflected strong earnings growth, net of divi-
(despite the offsetting effect of $13 billion of securitizations over the dends, and a $1 billion net issuance of preferred shares since last year.
Capital management
Capital management framework (ii) Economic Capital: an internal assessment of the amount of equity
We actively manage our capital to balance the desire to maintain capital required to underpin our risks; and
strong capital ratios and high ratings with the objective of providing (iii) Subsidiary capital: the amount of regulatory capital invested
strong returns to our shareholders. In striving to achieve this balance, in subsidiaries.
we consider the requirements of regulators, rating agencies, deposi-
tors and shareholders, as well as our future business plans, peer This co-ordinated approach to capital management serves an impor-
comparisons and our position relative to internal targets for capital tant business function. Our goal is to optimize our capital usage and
ratios. Additional considerations include the costs and terms of current structure and provide efficient support for our business segments and
and potential capital issuances, and projected capital requirements. clients and better returns for our shareholders, while protecting our
Our capital management framework provides the policies and depositors and senior creditors.
processes for defining, measuring, raising and investing all forms of
capital in a co-ordinated and consistent manner. We manage and moni- Governance
tor our capital from several perspectives, including: The Board of Directors is responsible for the annual review and
(i) Regulatory capital: capital required for regulatory compliance approval of our capital plan, in conjunction with our operating plan.
defined in accordance with the Office of the Superintendent of The Audit Committee is responsible for the governance of capital man-
Financial Institutions Canada (OSFI) criteria; agement, which includes the approval of capital management policies,
Royal Bank of Canada: Annual Report 2007 71
Management’s Discussion and Analysis
the regular review of our capital position and liquidity, funding and Risk-adjusted assets (RAA)
capital management processes, and the ongoing review of internal Under the current Basel I framework, the calculation of RAA is deter-
control over financial reporting. In addition, the OSFI meets with mined by the OSFI-prescribed rules relating to on-balance sheet and
our Audit Committee and the Conduct Review and Risk Policy off-balance sheet exposures and includes an amount for the market
Committee (CR&RPC) to discuss policies and procedures regarding risk exposure associated with our trading portfolios.
capital management. During the year, RAA increased by $23.9 billion, with strong
The Asset & Liability Committee and the Group Executive share growth across most categories including loans, mortgages, and off-
management oversight responsibility for capital management and balance sheet derivative instruments. However, growth in nominal
receive regular reports detailing compliance with the established lim- assets was partially offset by the impact of a stronger Canadian dollar
its and guidelines. Corporate Treasury and Group Risk Management on the translated value of our foreign currency-denominated assets.
(GRM) are responsible for the design and implementation of policies
for regulatory, economic and subsidiary capital.
Risk-adjusted assets (1) Table 37
Risk-adjusted balance
Weighted
Balance average of
(C$ millions, except percentage amounts) sheet amount risk weights (2) 2007 2006
Balance sheet assets
Cash and deposits with banks $ 16,107 18% $ 2,852 $ 2,322
Securities
Issued or guaranteed by Canadian or other OECD (3) governments 16,858 – 52 42
Other 161,591 6% 9,495 7,811
Residential mortgages (4)
Insured 27,994 1% 355 363
Conventional 81,713 40% 32,885 27,921
Other loans and acceptances (4)
Issued or guaranteed by Canadian or other OECD (3) governments 32,577 17% 5,651 3,848
Other 171,422 69% 118,723 107,336
Other assets 92,100 11% 10,487 10,609
$ 600,362 $ 180,500 $ 160,252
Credit
equivalent
amount (5)
Off-balance sheet financial instruments
Credit instruments
Guarantees and standby letters of credit $ 19,758 60% $ 11,807 $ 14,092
Documentary and commercial letters of credit 100 78% 78 65
Securities lending (6) 36,187 3% 962 3,022
Commitments to extend credit 21,954 85% 18,752 16,666
Liquidity facilities 4,826 98% 4,746 4,413
Note issuances and revolving underwriting facilities – – – 4
$ 82,825 $ 36,345 $ 38,262
Derivatives (7) 57,973 25% 14,457 10,432
Total off-balance sheet financial instruments $ 140,798 $ 50,802 $ 48,694
Total specific and general market risk 16,333 14,763
Total risk-adjusted assets $ 247,635 $ 223,709
(1) Calculated using guidelines issued by the OSFI.
(2) Represents the weighted average of counterparty risk weights within a particular category.
(3) OECD stands for Organisation for Economic Co-operation and Development.
(4) Amounts are shown net of allowance for loan losses.
(5) The amount of credit exposure attributable to an off-balance sheet financial instrument, derived from the notional value of the exposure.
(6) In 2007, we implemented a new trading credit risk system in our London office that enables clearer identification of these balances, resulting in a lower risk-adjusted balance.
(7) Excludes non-trading credit derivatives given guarantee treatment for credit risk capital purposes.
Regulatory capital and capital ratios defined as the total of Tier 1 and Tier 2 capital less deductions as pre-
Capital levels for Canadian banks are regulated pursuant to guide- scribed by the OSFI. For further details on the terms and conditions of
lines issued by the OSFI, based on standards issued by the Bank for our non-cumulative preferred shares and innovative capital instruments,
International Settlements. Regulatory capital is allocated to two tiers: refer to Notes 17 and 18 of our Consolidated Financial Statements.
Tier 1 and Tier 2. Tier 1 capital comprises the more permanent com- Regulatory capital ratios are calculated by dividing Tier 1 and
ponents of capital and consists primarily of common shareholders’ Total capital by RAA. The OSFI formally establishes risk-based capital
equity, non-cumulative preferred shares, the majority of which do not targets for deposit-taking institutions in Canada. These targets are
have conversion features into common shares, and the eligible amount currently a Tier 1 capital ratio of 7% and a Total capital ratio of 10%.
of innovative capital instruments. In addition, goodwill is deducted In addition to the Tier 1 and Total capital ratios, Canadian banks are
from Tier 1 capital. required to ensure that their assets-to-capital multiple, which is
Tier 2 capital consists mainly of subordinated debentures, trust calculated by dividing gross adjusted assets by Total capital, does not
subordinated notes, the eligible amount of innovative capital instru- exceed a maximum level prescribed by the OSFI.
ments that could not be included in Tier 1 capital, and an eligible The components of regulatory capital and our regulatory capital
portion of the total general allowance for credit losses. Total capital is ratios are shown in the following table.
72 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Regulatory capital and capital ratios (1) Table 38
(C$ millions, except percentage amounts) 2007 2006
Tier 1 capital
Common equity (2) $ 22,272 $ 21,065
Non-cumulative preferred shares 2,344 1,345
Trust capital securities 3,494 3,222
Other non-controlling interest in subsidiaries 25 28
Goodwill (4,752) (4,182)
23,383 21,478
Tier 2 capital
Permanent subordinated debentures (3) 779 839
Non-permanent subordinated debentures (3) 5,473 6,313
General allowances 1,221 1,223
Trust capital securities (excess over 15% Tier 1) – 249
Trust subordinated notes 1,027 –
Accumulated net unrealized gain on available-for-sale equity securities (4) 105 –
8,605 8,624
Other deductions from capital
Investment in insurance subsidiaries (2,912) (2,795)
Other (505) (643)
Total capital $ 28,571 $ 26,664
Capital ratios
Tier 1 capital to risk-adjusted assets 9.4% 9.6%
Total capital to risk-adjusted assets 11.5% 11.9%
Assets-to-capital multiple 19.9X 19.7X
(1) As defined in the guidelines issued by the OSFI.
(2) This amount is Shareholders’ equity less preferred shares of $2,050 million and other items not included in regulatory capital of $117 million.
(3) Subordinated debentures that are within five years of maturity are subject to straight-line amortization to zero during their remaining term and, accordingly, are included above at their
amortized value.
(4) As prescribed by the OSFI, certain components of Accumulated other comprehensive income (AOCI) are included in the determination of regulatory capital. Accumulated net foreign cur-
rency translation adjustments are included in Tier 1 capital in common equity. Net unrealized fair value losses on available-for-sale (AFS) equities are deducted in the determination of
Tier 1 capital while net unrealized fair value gains on AFS equities are included in Tier 2 capital.
As at October 31, 2007, the Tier 1 capital ratio was 9.4% and the Total
Tier 1 capital ratio
capital ratio was 11.5%.
The Tier 1 capital ratio was down 20 bps from a year ago. The
12% decrease was largely due to business growth, including acquisitions,
9.7%
8.9%
9.6% 9.6% 9.4% which resulted in an increase in RAA and a higher goodwill deduction
9%
from capital. The impact of our common share repurchases under our
6% normal course issuer bid also contributed to the decrease. These fac-
tors were partially offset by strong generation of capital from earnings
3% and the issuance of preferred shares.
0% The Total capital ratio was down 40 bps from a year ago due to
2003 2004 2005 2006 2007 growth in RAA and the redemption of subordinated debentures. These
factors were partially offset by the issuance of trust subordinated notes.
As at October 31, 2007, our assets-to-capital multiple was
19.9 compared to 19.7 a year ago. Our assets-to-capital multiple
remains below the maximum of 23 that is allowed by the OSFI.
Selected capital management activity Table 39
(C$ millions) 2007 2006
Dividends
Common $ 2,321 $ 1,847
Preferred 88 60
Common shares issued (1) 152 115
Repurchase of common shares – normal course issuer bid (2) (646) (844)
Preferred shares issued 1,150 600
Preferred shares redeemed (150) (250)
Subordinated debentures issued 87 –
Repurchase and redemption of debentures (3) (985) (955)
Issuance of Trust subordinated notes (4) 1,000 –
(1) Represents cash received for stock options exercised during the year.
(2) For further details, refer to Note 18 to our Consolidated Financial Statements.
(3) For further details, refer to Note 16 to our Consolidated Financial Statements.
(4) For further details, refer to Note 17 to our Consolidated Financial Statements.
Royal Bank of Canada: Annual Report 2007 73
Management’s Discussion and Analysis
In 2007, we undertook several initiatives to support the effective man- Tier 2
agement of our capital. During the year, we purchased US $24 million of our outstanding
US $300 million floating rate debentures maturing in 2085.
Tier 1
On June 26, 2007, we issued JP¥10 billion (C$87 million) Japanese
In 2007, we repurchased 11.8 million common shares for $646 million
Yen-denominated subordinated debentures.
under our NCIB that expired on October 31, 2007. Effective November 1,
On June 4, 2007, we redeemed all of our outstanding $500 million
2007, we renewed our NCIB to repurchase up to 20 million common
subordinated debentures due June 4, 2012, at par value plus accrued
shares, or 1.6%, of our outstanding common shares as at October 31,
interest.
2007. This NCIB will expire on October 31, 2008.
On April 30, 2007, we issued $1 billion of subordinated deben-
On April 26, 2007, we issued $250 million of Non-cumulative
tures through RBC Subordinated Notes Trust, a closed-end trust wholly
First Preferred Shares Series AG at $25 per share.
owned by us.
On March 14, 2007, we issued $200 million of Non-cumulative
On November 8, 2006, we redeemed all of our outstanding
First Preferred Shares Series AF at $25 per share.
US $400 million floating-rate subordinated debentures due
On January 19, 2007, we issued $250 million of Non-cumulative
November 8, 2011, for 100% of their principal amount plus accrued
First Preferred Shares Series AE at $25 per share.
interest to the redemption date.
On December 13, 2006, we issued $250 million of Non-
cumulative First Preferred Shares Series AD at $25 per share.
Dividends
On November 24, 2006, we redeemed all of the issued and out-
Our common share dividend policy reflects our earnings outlook,
standing $150 million Non-cumulative First Preferred Shares Series O.
desired payout ratio and the need to maintain adequate levels of
On November 1, 2006, we issued $200 million of Non-cumulative
capital to fund business opportunities. The targeted common share
First Preferred Shares Series AC at $25 per share.
dividend payout ratio for 2007 was 40% to 50%. In 2007, the dividend
payout ratio was 43%, up from 40% in 2006. Common share dividends
paid during the year were $2.3 billion, up 26% from a year ago.
Share data and dividends Table 40
2007 2006 2005
(C$ millions, except number of shares Number of Dividends Number of Dividends Number of Dividends
and per share amounts) shares (000s) Amount per share shares (000s) Amount per share shares (000s) Amount per share
First Preferred (1)
Non-cumulative Series N 12,000 $ 300 $ 1.18 12,000 $ 300 $ 1.18 12,000 $ 300 $ 1.18
Non-cumulative Series O – – – 6,000 150 1.38 6,000 150 1.38
Non-cumulative Series S – – – – – 1.33 10,000 250 1.53
Non-cumulative Series W 12,000 300 1.23 12,000 300 1.23 12,000 300 .99
Non-cumulative Series AA 12,000 300 1.11 12,000 300 .71 – – –
Non-cumulative Series AB 12,000 300 1.18 12,000 300 .41 – – –
Non-cumulative Series AC 8,000 200 1.22 – – – – – –
Non-cumulative Series AD 10,000 250 1.06 – – – – – –
Non-cumulative Series AE 10,000 250 .95 – – – – – –
Non-cumulative Series AF 8,000 200 .77 – – – – – –
Non-cumulative Series AG 10,000 250 .65 – – – – – –
Total First Preferred $ 2,350 $ 1,350 $ 1,000
Common shares outstanding 1,276,260 $ 7,300 $ 1.82 1,280,890 $ 7,196 $ 1.44 1,293,502 $ 7,170 $ 1.18
Treasury shares – preferred (249) (6) (94) (2) (91) (2)
Treasury shares – common (2,444) (101) (5,486) (180) (7,053) (216)
Stock options
Outstanding 26,623 32,243 36,481
Exercisable 21,924 26,918 28,863
(1) As at October 31, 2007, the aggregate number of common shares issuable on the conversion of the First Preferred Shares Series N was approximately 5,743,000. As at October 31, 2007,
the First Preferred Shares Series W was not yet convertible. The other preferred shares do not have conversion options.
As at November 23, 2007, the number of outstanding common shares and Treasury shares – common were 263,000 and 2,775,000,
and stock options were 1,276,292,000 and 26,591,000, respectively. respectively. For further information about our share capital, refer to
As at November 23, 2007, the number of Treasury shares – preferred Notes 18 and 21 to our Consolidated Financial Statements.
74 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Hedging foreign currency-denominated operations Economic Capital is calculated and attributed on a wider array
Increasing amounts of U.S. dollar-denominated assets and deduc- of risks than is regulatory capital, which is primarily limited to credit,
tions from regulatory capital prompted our development of a policy market (trading) and, under Basel II, operational risk. Economic
for hedging our foreign exchange exposure with respect to our foreign Capital also includes goodwill and intangibles. The identified risks
operations. The objectives of our hedging policy are: (i) stabilization of (described below) for which we calculate Economic Capital are credit,
our consolidated regulatory capital ratios from currency fluctuations, market (trading and non-trading), operational, business, fixed asset,
and (ii) mitigation of potential earnings volatility that might result and insurance. Additionally, Economic Capital allows for diversification
if we dispose of these investments in foreign operations. When the benefits across risks and business segments.
Canadian dollar strengthens/weakens against other currencies, the • Credit risk is the risk of loss associated with a counterparty’s
losses/gains on net foreign investments reduce/increase our capital, inability or unwillingness to fulfill its payment obligations.
as well as our RAA and goodwill of the foreign currency-denominated • Market risk is the risk of loss that may arise from changes in
operations. Selecting an appropriate level of hedging for our invest- market factors such as interest rates, foreign exchange rates,
ment in foreign operations ensures that our regulatory capital ratios equity or commodity prices, or the volatility of these factors, in
are not materially impacted by currency fluctuations due to the offset- both banking and trading books. Market risk can be exacerbated
ting impact of the proportionate movements in the assets and capital. by thinly traded or illiquid markets.
Hedging our operations denominated in foreign currencies • Operational risk is the risk of loss resulting from inadequate
promotes orderly and efficient capital management. It facilitates com- or failed internal processes, people and systems or from
pliance with regulatory requirements on an ongoing basis and enables external events.
us to maintain greater control over key capital ratios, thereby reducing • Business risk is the risk of loss due to variances in volumes,
the need for capital transactions in response to currency fluctuations. prices and costs caused by competitive forces, regulatory
changes, reputation and strategic risks.
Economic Capital • Fixed asset risk is defined as the risk that the value of fixed assets
Economic Capital is our own quantification of risks associated with will be less than their book value at a future date.
business activities. Economic Capital is defined as the capital required • Insurance risk is the risk of loss that may occur when assumptions
to remain solvent and in business even under extreme market con- made in insurance product design and pricing activities differ
ditions, given our desire to maintain a debt rating of at least AA. from actual experience.
Economic Capital is attributed to each business segment in proportion
to management’s assessment of the risks. It allows for comparable For further discussion of credit, market, operational and insurance
performance measurements among our business segments through risk, refer to the Risk management section.
Return on Equity ( ROE) and Return on Risk Capital ( RORC), which are The calculation and attribution of Economic Capital involves a
described in detail in the Key performance and non- GAAP measures number of assumptions and judgments. The methodologies are con-
section. Accordingly, Economic Capital aids senior management in tinually monitored to ensure that the Economic Capital framework
resource allocation and serves as a reference point for the assessment is comprehensive and consistent. Economic Capital measurement
of our aggregate risk appetite in relation to our financial position, rec- models and techniques are developed by GRM and are subject to inde-
ognizing that factors outside the scope of Economic Capital must also pendent assessment for appropriateness and reliability. The models
be taken into consideration. are continually benchmarked to leading industry practices via partici-
Economic Capital is also used to assess the adequacy of our pation in surveys, reviews of methodologies and ongoing interaction
capital base. Our policy is to maintain a level of common equity and with external risk-management industry professionals. The models
other instruments with equity-like permanence and loss absorption and input parameters are subject to independent vetting and valida-
features that exceed Economic Capital with a comfortable cushion. tion, as per internal model risk policies.
Economic Capital Table 41
(C$ millions average balances) 2007 2006
Credit risk $ 6,850 $ 5,800
Market risk (trading and non-trading) 2,700 2,500
Operational risk 2,750 2,450
Business and fixed asset risk 2,000 1,800
Insurance risk 150 200
Risk capital $ 14,450 $ 12,750
Goodwill and intangibles 5,550 4,650
Economic Capital $ 20,000 $ 17,400
Unattributed capital 2,000 2,500
Common equity $ 22,000 $ 19,900
Economic Capital increased $2.6 billion from a year ago largely due which were partially offset by the favourable impact of a stronger
to increases in Credit risk capital, Goodwill and intangibles and Canadian dollar on the translated value of foreign currency-
Operational risk capital. The increases in Credit risk and Operational denominated assets.
risk capital were primarily due to business growth including the impact We remain well capitalized with current levels of qualified equity
of our acquisitions of Flag, the AmSouth branches and Carlin. Goodwill exceeding the Economic Capital required to underpin all of our risks.
and intangibles increased primarily as a result of these acquisitions,
Royal Bank of Canada: Annual Report 2007 75
Management’s Discussion and Analysis
Subsidiary capital • implementation of a robust internal capital adequacy assessment
Management of consolidated capital has become a strategic objec- process (ICAAP).
tive for us as the amount of capital deployed in subsidiaries to build
their businesses has grown in order to maximize profits and returns Our approach to capital adequacy is a co-ordinated effort involv-
to our shareholders. Accordingly, regulatory bodies have focused on ing functional units such as GRM, Corporate Treasury, and Finance.
ensuring that for all internationally active banks, capital recognized Currently, GRM works in partnership with our businesses to identify,
in regulatory capital measurements is accessible by the parent entity. measure, mitigate and monitor all forms of risk, as described in the
At the same time, subsidiaries should be sufficiently capitalized on Risk management section. Capital adequacy is assessed and deter-
a stand-alone basis and in compliance with local regulatory require- mined with consideration of the full range of risk controls and capital
ments at all times. In addition to minimum capital requirements, these management tools available to us. We view capital adequacy as a
local regulations may include restrictions on the transfer of assets in dynamic process that considers multiple variables, including earnings,
the form of cash, dividends, loans or advances. For further details, asset growth and capital transactions, within regulatory and financial
refer to Note 18 to our Consolidated Financial Statements. To balance market constraints in order to meet strategic goals.
these regulatory requirements and facilitate the co-ordinated genera- Our initial ICAAP was presented to the Audit Committee in
tion and allocation of capital across the enterprise, we have put in October 2007. This ICAAP incorporates senior management oversight,
place a comprehensive subsidiary capital management framework. comprehensive risk-based stress testing of regulatory capital require-
This framework sets guidelines for defining capital investments in our ments and our own assessment of risk based on Economic Capital,
subsidiaries and establishes an overall limit for total investment in which is expected to play a greater role in capital adequacy assess-
those subsidiaries. ments under Basel II.
While each of our subsidiaries has individual responsibility for Our ICAAP demonstrates that we are well capitalized, having
calculating, monitoring and maintaining capital adequacy in compli- enough capital to meet management’s assessment of required
ance with the laws and regulations of its local jurisdiction, Corporate capital under both normal market conditions and a range of severe but
Treasury is mandated to provide centralized oversight and consoli- plausible stress testing scenarios. It serves as an important tool in the
dated capital base management across various entities. establishment of our internal capital ratios target within the broader
context of our capital management framework, and will be subject to
Other considerations affecting capital annual review and ongoing development.
Transition to Basel II In addition to our ICAAP, several of our subsidiaries are required to
Beginning in the first quarter of 2008, as a result of the OSFI’s adop- submit entity level ICAAPs to local regulators. While these assessments
tion of new guidelines based on “International Convergence of are the responsibility of the respective subsidiaries, Corporate Treasury
Capital Measurement and Capital Standards: A Revised Framework – liaises with subsidiaries to ensure enterprise-wide consistency.
Comprehensive Version (June 2006),” known as Basel II, Canadian Our implementation of Basel II will produce capital requirements
banks will be required to calculate and report their regulatory capital that may differ from those calculated under the current Basel I frame-
ratios under new measurement standards. We intend to adopt the work. For the most part, this reflects a shift in calculation methodology
Advanced Internal Ratings Based (AIRB) Approach for credit risk and, from application of prescribed risk weights to processes that are
initially, the Standardized Approach for operational risk. There will be more closely aligned with our internal risk management practices.
no changes in the treatment of market risk. For details on our Basel II Also, Basel II incorporates a specific charge for operational risk that
risk approaches, refer to the Risk management section. is not currently required under Basel I. As Basel II will be applied on a
As part of the Basel II process, Canadian banks must demonstrate prospective basis, comparability to historical data and capital ratios
to the OSFI that they have met the AIRB requirements and that their reported under Basel I may be difficult.
capital reporting is accurate and of high quality. The OSFI has been Disclosure requirements under Basel II will begin with our first
engaged in extensive AIRB approval reviews throughout 2007. Our quarter 2008 financial disclosure, and will continue to evolve over
final application package, for adoption of the AIRB Approach for most 2008, with all quantitative and qualitative requirements being met
material portfolios, was submitted to the OSFI on October 31, 2007 with the release of our 2008 annual report.
and the formal approval decision is expected by December 31, 2007.
Once we achieve full compliance with the AIRB requirements and the Accounting considerations
OSFI has agreed, we may proceed to reflect capital below Basel I levels, In addition to the regulatory environment, we closely monitor changes
subject to a two-year transitional floor requirement where our capital in accounting rules and their potential impact on our capitalization
must reflect 90% and 80% of our Basel I capital charges. As required levels. With the recent adoption of the new financial instruments
by the OSFI since November 1, 2006, we have been calculating capital accounting standards under Canadian GAAP, differences exist between
requirements in parallel under both the Basel I and Basel II rules. the measurement of capital as disclosed in the financial statements
Also, the OSFI has made some allowances for staged implemen- and that used for regulatory capital purposes. For example, under
tation. In particular, the OSFI has approved a waiver for RBC Centura Canadian GAAP, available-for-sale (AFS) debt securities are recognized
Bank to use the Standardized Approach for credit risk until 2010. at fair value, with unrealized gains and losses reported in Accumulated
We have also been granted an extension (applicable to non-North other comprehensive income (AOCI). In contrast, for regulatory capi-
American portfolios) for RBC Dexia IS, which plans to implement the tal purposes, these securities are measured at amortized cost, and
AIRB approach by June 2008. Additionally, the OSFI has approved an consequently, no unrealized gains or losses are reflected in regulatory
exemption for our Caribbean banking operations to report under the capital. Additionally, the unrealized gains and losses on derivatives
Standardized Approach as long as that portfolio remains non-material designated as cash flow hedges and reported in AOCI are excluded
(defined as 1% or less of total balance sheet and credit equivalent from regulatory capital.
amounts). Capital treatment for equity investments in other entities is deter-
Notwithstanding that our risk and capital management processes mined by a combination of accounting and legal guidelines based on
were already substantially consistent with the principles embodied in the size or nature of the investment. Three broad approaches apply
Basel II, we have introduced new policies and enhanced practices, as as follows:
appropriate, to facilitate transition to Basel II. These include meeting • Consolidation: entities in which we have a controlling interest
requisite standards for: must be fully consolidated on our consolidated balance sheet.
• risk rating system design and operation Joint ventures are consolidated on a pro rata basis. Consolidated
• risk quantification, validation, and use of rating systems and holdings are capitalized directly by asset class and are not
internal ratings treated as equity investments for regulatory capital calculation
• corporate governance and oversight purposes.
76 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
• Deduction: certain holdings are deducted in full from our regu- While Basel II retains the same criteria for determination of capital
latory capital. These include all “substantial” investments (as treatment of equities, the prescribed risk weightings are generally
defined by the Bank Act), as well as all investments in insurance higher than under Basel I.
subsidiaries.
• Risk weighting: unconsolidated equity investments that are not
deducted from capital are risk weighted at a prescribed rate for
determination of capital charges.
Off-balance sheet arrangements
In the normal course of business, we engage in a variety of finan- transfer risks relating to selected elements of our financial assets
cial transactions that, under GAAP, are not recorded on our balance without actually transferring the assets through the use of certain
sheet. Off-balance sheet transactions are generally undertaken for financial instruments.
risk management, capital management and/or funding management
purposes for our benefit and the benefit of our clients. These transac- Credit card receivables
tions include transactions with special purpose entities and issuance We securitize a portion of our credit card receivables through a SPE
of guarantees. These transactions give rise to, among other risks, on a revolving basis. The SPE is funded through the issuance of senior
varying degrees of market, credit, liquidity and funding risk, which are and subordinated notes collateralized by the underlying credit card
discussed in the Risk management section. receivables. The issuances are rated by at least two of DBRS, Moody’s
Investors Service (Moody’s) or Standard & Poor’s Corporation
Derivatives (S&P). This SPE meets the criteria for a QSPE and, accordingly, as the
On November 1, 2006, we adopted three new accounting standards transferor of the credit card receivables, we are precluded from con-
that were issued by the CICA related to financial instruments. These solidating this SPE .
standards and the impact on our financial position and results of We continue to service the credit card receivables sold to the
operations are discussed in the Impact of the new financial instru- QSPE and perform an administrative role for the QSPE . We also provide
ments accounting standards section and in Note 1 to our Consolidated first-loss protection to the QSPE in two forms. We have an interest in
Financial Statements. With the adoption of these standards, all deriva- the excess spread from the QSPE which is subordinate to the QSPE’s
tives including derivatives that qualified for hedge accounting are now obligation to the holders of its asset-backed securities. Excess spread
recognized on the Consolidated Balance Sheets at fair value. Prior to is the residual net interest income after all trust expenses have been
November 1, 2006, derivatives that qualified for hedge accounting paid. Our excess spread serves to absorb losses with respect to the
were not carried at fair value on our Consolidated Balance Sheets. credit card receivables before payments to the QSPE’s noteholders
Refer to Note 7 to our Consolidated Financial Statements for detailed are affected. The present value of this excess spread is reported as
information on our derivatives products. a retained interest within our AFS securities on our Consolidated
Balance Sheets. In addition, we provide loans to the QSPE to pay
Special purpose entities upfront expenses. These loans rank subordinate to all notes issued by
Special purpose entities ( SPE s) are typically set up for a single, the QSPE .
discrete purpose, have a limited life and serve to legally isolate the
financial assets held by the SPE from the selling organization. They Residential mortgage loans
are not operating entities and usually have no employees. SPE s may We securitize Canadian insured residential mortgage loans through
be variable interest entities (VIE s) as defined by CICA Accounting the creation of mortgage-backed securities ( MBS ) and sell a portion
Guideline 15, Consolidation of Variable Interest Entities (AcG-15). of these MBS to an independent SPE on a revolving basis. We retain
Refer to the Critical accounting policies and estimates section and interests in the excess spread on the sold MBS and continue to service
Notes 1 and 6 to our Consolidated Financial Statements, for our the underlying mortgages that we have securitized for funding and
consolidation policy and information about the VIE s that we have con- liquidity purposes.
solidated, or in which we have significant variable interests. Pursuant We did not securitize any residential mortgages synthetically in
to CICA Accounting Guideline 12, Transfers of Receivables (AcG-12), 2007. As at October 31, 2006, we had synthetically securitized
Qualifying SPE s ( QSPE) are legal entities that are demonstrably $20 billion in residential mortgage loans through financial guarantees.
distinct from the transferor, have limited and specified permitted
activities, have defined asset holdings and may only sell or dispose of Commercial mortgage loans
selected assets in automatic response to specified conditions. We securitize commercial mortgages by selling them in collateral pools,
We manage and monitor our involvement with SPE s through our which meet certain diversification, leverage and debt coverage criteria,
Structured Transactions Oversight Committee. Refer to the Risk man- to SPE s, one of which is sponsored by us. The SPEs finance the pur-
agement section for further details. chase of these pools by issuing certificates that carry varying degrees
of subordination. The certificates issued by the SPE which we sponsor
Securitization of our financial assets range from AAA to B- and are rated by any two of DBRS, Moody’s and
We periodically securitize our credit card receivables and residential S&P. The most subordinated certificates are unrated. The certificates
mortgage loans primarily to diversify our funding sources and enhance represent undivided interests in the collateral pool, and the SPE which
our liquidity position. We also securitize residential and commercial we sponsor, having sold all undivided interests available in the pool,
mortgage loans for sales and trading activities. Gains and losses on retains none of the risk of the collateral pools. We do not retain any
securitizations are included in Non-interest income. Refer to Note 1 to beneficial interests in the loans sold unless we purchase some of the
our Consolidated Financial Statements for our accounting policy for securities issued by the SPEs for our own account. We are the primary
loan securitizations. servicer under contract with a third-party master servicer for the loans
In addition to traditional securitizations where we sell our that are sold to the SPE that is sponsored by us.
loans and receivables, we also enter into synthetic securitizations to
Royal Bank of Canada: Annual Report 2007 77
Management’s Discussion and Analysis
Interest expenses on the senior deposit notes issued to Trust II
Our financial asset securitizations Table 42
and Trust III amounted to $52 million and $23.6 million, respectively
(C$ millions) 2007 2006 (2006 – $52 million and nil, 2005 – $52 million and nil) during the year.
Outstanding securitized assets For further details on the capital trusts and the terms of the TruCS and
Residential mortgages $ 18,384 $ 14,131 TSNs issued and outstanding, refer to the Capital management section
Credit cards 3,650 3,650 and Note 17 to our Consolidated Financial Statements.
Commercial mortgages 3,727 1,914
Total $ 25,761 $ 19,695 Securitization of client financial assets
Retained interests Within our Global Securitization Group, our principal relationship with
Residential mortgages SPEs comes in the form of administering seven multi-seller asset-backed
Mortgage-backed securities retained (1) $ 5,954 $ 5,591 commercial paper conduit programs (multi-seller conduits) – four in
Retained rights to future excess interest 414 206 Canada and three in the United States. We are involved in the multi-
Credit cards
seller conduit markets because our clients value these transactions,
Asset-backed securities purchased (2) 870 1,390
Retained rights to future excess interest 27 26 they offer us a growing source of revenue and they generate a favour-
Subordinated loan receivables 3 6 able risk-adjusted return for us. Our clients primarily utilize multi-seller
Commercial mortgages conduits to diversify their financing sources and to reduce funding
Asset-backed securities purchased (2) 47 – costs by leveraging the value of high-quality collateral. The multi-seller
Total $ 7,315 $ 7,219 conduits purchase various financial assets from clients and finance the
(1) All residential mortgages securitized are Canadian insured mortgages. purchases by issuing highly rated asset-backed commercial paper. The
(2) Securities purchased during the securitization process. multi-seller conduits typically purchase the financial assets as part of a
securitization transaction by our clients. In these situations, the sellers
Securitization activities during 2007 of the financial assets continue to service the respective assets and
During the year, we securitized $13.3 billion of residential mortgages, generally provide some amount of first-loss protection on the assets.
of which $6.2 billion were sold, $3.7 billion were reinvested in revolv- The multi-seller conduits also financed assets that were either in
ing securitizations and the remaining $3.4 billion were retained. We the form of securities, including collateralized debt obligations (CDOs)
also securitized $1.9 billion of commercial mortgages and purchased or instruments that closely resemble securities such as credit-linked
$48 million (principal value) related securities during the securitiza- notes. The credit quality of these transactions is very high, often in the
tion process. Refer to Note 5 to our Consolidated Financial Statements highest available rating categories established by the rating agencies
for further details and the amounts of impaired and past due loans that assign ratings to these types of securities or security-like instru-
that we manage and any losses recognized on securitization activities ments. In these situations, the multi-seller conduit is often one of
during the year. many investors in the securities or security-like instruments.
The commercial paper issued by each multi-seller conduit is in the
Capital trusts multi-seller conduit’s own name with recourse to the financial assets
We issue innovative capital instruments, RBC Trust Capital Securities owned by the multi-seller conduit. The multi-seller conduit commercial
(TruCS) and RBC Trust Subordinated Notes (TSNs), through three paper is non-recourse to us except through our participation in liquid-
SPE s: (i) RBC Capital Trust (Trust), (ii) RBC Capital Trust II (Trust II) and ity and/or credit enhancement facilities, and non-recourse to the other
(iii) RBC Trust Subordinated Trust (Trust III). We consolidated Trust but multi-seller conduits that we administer.
do not consolidate Trust II or Trust III because we are not the Primary We do not maintain any ownership or retained interests in these
Beneficiary since we are not exposed to the majority of the expected multi-seller conduits. We provide services such as transaction struc-
losses, and we do not have a significant interest in these trusts. As at turing and administration as specified by the multi-seller conduit
October 31, 2007, we held the residual interest of $1 million and program documents, for which we receive fees. In addition, we provide
$1 million (2006 – $1 million and nil) in Trust II and Trust III, respec- backstop liquidity facilities and partial credit enhancements to the
tively. We had a loan receivable of $40 million (2006 – $42 million) multi-seller conduits. Our maximum exposure to loss under these facil-
from Trust II and of $30 million from Trust III (2006 – nil), and reported ities is $42.9 billion for 2007 and $35.1 billion for 2006. The increase
the senior deposit notes of $900 million and $999.8 million (2006 – in liquidity and credit facilities is due to the increase in the multi-seller
$900 million and nil) that we issued to Trust II and Trust III in our conduits’ activities during the year. We have no rights to, or control of,
deposit liabilities. Under certain circumstances, TruCS of Trust II will be the assets owned by the multi-seller conduits. Fee revenue for all such
automatically exchanged for our preferred shares and TSNs exchanged services, which is reported as Non-interest income, amounted to
for our subordinated notes without prior consent of the holders. In $72 million during the year (2006 – $60 million, 2005 – $58 million).
addition, TruCS holders of Trust II have the right to exchange for our Total commitments and amounts outstanding under liquidity
preferred shares as outlined in Note 17 to our Consolidated Financial and credit enhancement facilities for the multi-seller conduits as at
Statements. October 31, 2007 and 2006, which are also included in our discussion
in the Guarantees section, are shown below:
Liquidity and credit enhancement facilities Table 43
2007 2006
Maximum Maximum
exposure exposure
(C$ millions) Committed to loss Outstanding Committed to loss Outstanding
Backstop liquidity facilities $ 42,567 $ 38,726 $ – $ 34,880 $ 31,686 $ –
Credit enhancement facilities 4,185 4,185 – 3,404 3,404 –
78 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
The following is a summary of our maximum exposure to loss cat- The assets in these SPE s amounted to $5.2 billion as at
egorized by securitized client asset type in the multi-seller conduits for October 31, 2007 (2006 – $3.8 billion), of which $.3 billion were con-
the years ended October 31, 2007 and 2006. solidated as at October 31, 2007 (2006 – $.7 billion). The majority of
the increase in these assets is due to the creation of new SPEs in 2007.
Maximum exposure to loss by client asset type Table 44 Structured finance
(C$ millions) 2007 2006 We occasionally invest in off-balance sheet entities in the form of
loan substitute and equity investments that are part of transactions
Outstanding securitized assets
Auto loans and leases $ 12,157 $ 7,073 structured to achieve a desired outcome, such as limiting exposure to
Asset-backed securities 164 195 specific assets or risks, obtaining indirect (and usually risk mitigated)
Consumer loans 1,769 2,659 exposure to financial assets, funding specific assets, supporting an
Credit cards 11,125 8,856 enhanced yield and meeting client requirements. These transactions
Dealer floor plan receivables 496 – usually yield a higher return or provide lower-cost funding on an after-
Electricity market receivables 306 306 tax basis than financing non-SPE counterparties, holding an interest in
Equipment receivables 2,279 2,132
financial assets directly, or receiving on-balance sheet funding. These
Insurance premiums 610 664
Other loans 288 – transactions are structured to mitigate risks associated with directly
Residential mortgages 3,793 4,358 investing in the underlying financial assets, or directly receiving fund-
Securities 1,669 1,497 ing, and may be structured so that our ultimate credit risk is that of
Student loans 2,654 2,928 a non-SPE , which in most cases is another financial institution. Exit
Trade receivables 5,133 3,537 mechanisms are built into these transactions to curtail exposure from
Truck loans and leases 468 885
changes in law or regulations. We consolidate structured finance VIE s
Other – –
in which our interests expose us to a majority of the expected losses.
Total $ 42,911 $ 35,090 In 2007, we reduced our total investments in certain transactions.
The unconsolidated entities in which we have significant investments
All the multi-seller conduits were restructured in 2004. As part of the or loans had total assets of $4.8 billion as at October 31, 2007
restructurings, an unrelated third party (expected loss investor) agreed (2006 – $6.9 billion). As at October 31, 2007, our total investments
to absorb credit losses, up to a maximum contractual amount, that may in and loans to these entities were $2.5 billion (2006 – $2.9 billion),
occur in the future on the assets in the multi-seller conduits (multi-seller which are reflected on our Consolidated Balance Sheets.
conduit first-loss position) before us and the multi-seller conduit’s debt
holders. In return for assuming this multi-seller conduit first-loss posi- Investment funds
tion, the expected loss investor is paid by the multi-seller conduit a We enter into derivative transactions with third parties including
return commensurate with its risk position. Moreover, each multi-seller mutual funds, unit investment trusts and other investment funds for
conduit has granted to the expected loss investor material voting rights, fees to provide their investors with the desired exposure and hedge
including the right to approve any transaction prior to the multi-seller our exposure from these derivatives by investing in other funds.
conduit purchasing and financing a transaction. As a result of the We consolidate the investment funds when our participation in the
restructurings, we do not consolidate any of the multi-seller conduits. derivative or our investment in other funds exposes us to a majority
As a result of increased activities during 2007, these seven multi-seller of the respective expected losses. The total assets held in the funds
conduits have financial assets totalling $29.3 billion as at October 31, where we have significant exposure and which we did not consolidate
2007 (2006 – $24.8 billion). The maximum assets that may have to be were $1.6 billion as at October 31, 2007 (2006 – $3.6 billion). The
purchased by the conduits under purchase commitments outstanding decrease is primarily due to a reduction of assets in one of the
as at October 31, 2007 were $41.8 billion (2006 – $34.3 billion). investment funds. As at October 31, 2007, our total exposure was
$423 million (2006 – $319 million).
Creation of credit investment products
We use SPEs to generally transform credit derivatives into cash instru- Trusts, mutual and pooled funds
ments, to distribute credit risk and to create customized credit products Our joint venture RBC Dexia IS provides global custody, fund and
to meet the needs of investors with specific requirements. As part of pension administration of client assets as well as the provision of
this process, we may transfer our assets to the SPEs with an obligation shareholders services, foreign exchange, securities lending and
to buy these assets back in the future and may enter into derivative other related services. With respect to trusteeship and/or custodian
contracts with these SPEs in order to convert various risk factors such services for personal and institutional trusts, RBC Dexia IS has a fidu-
as yield, currency or credit risk of underlying assets to meet the needs ciary responsibility to act in the best interests of the beneficiaries of
of the investors. In this role as derivative counterparty to the SPE, we the trusts. RBC Dexia IS earns fees for providing these services and
also assume the associated counterparty credit risk of the SPE. we include 50% of these fees in our revenue, representing our share
These SPE s often issue notes. The notes may be rated by external of interest in the joint venture. Refer to Note 9 to our Consolidated
rating agencies, as well as listed on a stock exchange, and are gener- Financial Statements for more details.
ally traded via recognized bond clearing systems. While the majority of We manage assets in mutual and pooled funds and earn fees at
the notes are expected to be sold on a “buy and hold” basis, we may market rates from these funds, but do not guarantee either principal or
occasionally act as market maker. We do not, however, provide any returns to investors in any of these funds.
SPE with guarantees or other similar support commitments; instead
we buy credit protection from these SPE s through credit derivatives. Guarantees
The investors in the notes ultimately bear the cost of any payments We issue guarantee products, as defined by the CICA Accounting
made by the SPE under these credit derivatives. We consolidate the Guideline 14, Disclosure of Guarantees (AcG-14), in return for fees
SPE s in which our investments in the notes expose us to a majority of recorded in Non-interest income. Significant types of guarantee
the expected losses. products we have provided to third parties include credit derivatives,
There are many functions required to create such a product. written put options, securities lending indemnifications, backstop
We fulfill some of these functions and independent third parties or liquidity facilities, financial standby letters of credit, performance
specialist service providers fulfill the remainder. Currently we act as guarantees, stable value products, credit enhancements, mortgage
sole arranger and swap provider for SPE s where we are involved and, loans sold with recourse and certain indemnification agreements.
in most cases, act as paying and issuing agent as well. As with all our
trading derivatives, the derivatives with these SPE s are carried at fair
value in derivative-assets and liabilities.
Royal Bank of Canada: Annual Report 2007 79
Management’s Discussion and Analysis
Due to the adoption of the three new financial instrument account- As at October 31, 2007, we had $40.4 billion in backstop liquidity
ing standards on November 1, 2006, financial guarantees are now facilities related to asset-backed commercial paper programs, of which
recognized at inception at the fair value of the obligation undertaken in 96% were committed to RBC-administered multi-seller conduits.
issuing the guarantee. Subsequent measurement of financial guaran- Note 27 to our Consolidated Financial Statements provides
tees at fair value is not required unless the financial guarantee qualifies detailed information regarding the nature and maximum potential
as a derivative. As the carrying value of these financial guarantees exposure for the above-mentioned types of guarantee products.
does not reflect our maximum potential amount of future payments, we
continue to consider guarantees as off-balance sheet arrangements. Commercial commitments
Prior to November 1, 2006, financial guarantees were required to be We also provide commercial commitments to our clients to help them
disclosed only in the notes to our Consolidated Financial Statements. meet their financing needs. On behalf of our clients we undertake
Our maximum potential amount of future payments in relation written documentary and commercial letters of credit, authorizing a
to our guarantee products as at October 31, 2007, amounted to third party to draw drafts on us up to a stipulated amount and typi-
$152 billion (2006 – $125 billion). In addition, as at October 31, 2007, cally having underlying shipments of goods as collateral. We make
RBC Dexia IS securities lending indemnifications totalled $63.5 billion commitments to extend credit, which represent unused portions of
(2006 – $45.6 billion); we are exposed to 50% of this amount. The authorizations to extend credit in the form of loans, bankers’ accep-
maximum potential amount of future payments represents the tances or letters of credit. We also have uncommitted amounts for
maximum risk of loss if there was a total default by the guaranteed which we retain the option to extend credit to a borrower. These
parties, without consideration of possible recoveries under recourse guarantees and commitments exposed us to liquidity and funding
provisions, insurance policies or collateral held or pledged. risks. The following is a summary of our off-balance sheet commercial
commitments.
Commercial commitments (1) Table 45
(C$ millions) Within 1 year 1 to 3 years Over 3 to 5 years Over 5 years Total
Documentary and commercial letters of credit $ 477 $ 24 $ – $ – $ 501
Commitments to extend credit and liquidity facilities 40,015 30,053 22,596 8,924 101,588
Uncommitted amounts (2) 47,110 – – – 47,110
$ 87,602 $ 30,077 $ 22,596 $ 8,924 $ 149,199
(1) Based on remaining term to maturity.
(2) Uncommitted amounts represent an amount for which we retain the option to extend credit to a borrower.
Risk management
Overview
Our business activities expose us to a wide variety of risks in virtually
all aspects of our operations. We manage these risks by seeking Risk Capacity
to ensure that business activities and transactions provide an appro-
priate balance of return for the risk assumed and remain within our Risk Appetite
risk appetite. Self-Imposed
Constraints
Our management of risk is supported by sound risk management
& Drivers
practices and effective enterprise risk management frameworks. The
cornerstone of these frameworks is a strong risk management culture,
Risk Limits
supported by a robust enterprise-wide set of policies, procedures and & Tolerances
limits, which involve our risk management professionals, business
segments and other functional teams. This partnership is designed
Risk Profile
to ensure the ongoing alignment of business strategies and activities
within our risk appetite.
Risk appetite Risk management principles
Our risk appetite framework provides a structured approach to defining We apply the following six overarching principles in the identification,
the amount and type of risk we are able and willing to accept in the pur- monitoring and management of risk throughout the organization:
suit of our business objectives. The risk appetite framework includes: (i) Balancing risk and reward is achieved through (a) aligning risk
• Identification of regulatory constraints that restricts our ability to appetite with business strategy, (b) diversifying risk, (c) pricing
accept risk and helps us to define our Risk Capacity, which appropriately for risk, (d) mitigating risk through preventive
represents the maximum amount and type of risk we can accept controls, and (e) transferring risk to third parties
• Establishment and regular confirmation of Self-Imposed (ii) Management of risk is shared at all levels of the organization.
Constraints & Drivers where we have chosen to limit or otherwise Business management is accountable for all risks assumed in
influence the amount of risk we undertake their operations, with direction and oversight provided by Group
• Translation of Risk Appetite into Risk Limits and Tolerances that Risk Management ( GRM ), Global Technology and Operations
guide our businesses in their risk taking activity (GTO), and Global Functions
• Periodic measurement and monitoring of our Risk Profile, which (iii) Effective decision-making is based on a strong understanding
compares actual exposure to our established Risk Limits and of risk
Tolerances. (iv) All business activities are conducted with the view of not risking
our reputation
(v) Assuring that services we provide are suitable for and understood
by our clients
(vi) Applying appropriate judgment is required throughout the organi-
zation in order to manage risk.
80 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Risk governance • Establishing risk controls and limits to ensure appropriate risk
Our overall risk governance structure is presented below. It illustrates diversification and optimization of risk and return on both a port-
the roles and responsibilities of the various stakeholders. folio and transactional basis
• Monitoring risk levels and reporting to senior management and
the Board of Directors on major risks we assume or face
• Acting as the catalyst in defining and communicating our
risk appetite.
Board of
Directors
Corporate Treasury is responsible for the management, oversight
hip
Cu
CR&RPC &
and reporting of our capital position, structural interest rate risk, and
ltu
ers
Audit Committee
r
wn
e–
liquidity and funding risks. Corporate Treasury recommends poli-
–O
Fra
cies and authorities relating to the identification, measurement and
me
g
Group Executive
rin
w
ito
management of liquidity and funding risk through ALCO and GRC for
ork
Group Risk Committee
on
–D
–M
Supporting Risk Committees approval by the Audit Committee.
ele
ion
ga
lat
tio
Business segments and corporate support groups
a
n–
Esc
Group Risk Management & Corporate Treasury
Acc
The business segments, GTO and Global Functions also have responsi-
–
ht
ou
ig
bility for the management of risk. These responsibilities include
nta
ers
Business Segments
bil
Ov
(i) accountability for their risks, (ii) alignment of business strategy
yit
Canadian Wealth U.S. & Capital with risk appetite, and (iii) identification, control and management of
Banking Management International Markets
Banking
their risks.
Global Technology & Operations Global Functions
Risk measurement
Our ability to measure risks is a key component of our enterprise-wide
Board and its committees risk management process. Certain measurement methodologies are
The Board of Directors provides oversight and carries out its risk common to a number of risk types, while others only apply to a single
management mandate through the Conduct Review and Risk Policy risk type. While quantitative risk measurement is important, we also
Committee (CR&RPC) and the Audit Committee. place reliance on qualitative factors. Our measurement models and
CR&RPC is designed to ensure that we have risk policies, pro- techniques are continually subject to independent assessment by GRM
cesses and controls in place to manage significant risks and ensure for appropriateness and reliability. For those risk types that are hard
compliance with the Bank Act (Canada) and other relevant laws and to quantify, we place greater emphasis on qualitative risk factors and
regulations. assessment of activities to gauge the overall level of risk in order to
Audit Committee provides oversight over the integrity of the ensure that they are within our risk appetite.
financial statements and reviews the adequacy and effectiveness of
internal controls and the control environment, and ensures that poli- Expected loss
cies related to liquidity, funding and capital management are in place. Expected loss represents those losses that are statistically expected
to occur in the normal course of business in a given period of time.
Group Executive (GE) and Group Risk Committee (GRC) With respect to credit risk, the key parameters used to measure
GE is our senior management team and is led by our President and our expected loss are the probability of default ( PD ), loss given default
Chief Executive Officer ( CEO ). GE has overall responsibility for our ( LGD ) and exposure at default ( EAD ). These parameters are deter-
strategy and its execution by establishing the “tone at the top.” Their mined based on historical experience, supplemented by benchmarking
risk oversight role is executed primarily through the mandate of GRC and updated on a regular basis, and are defined as follows:
and the five supporting risk committees as follows: • PD : An estimated percentage that represents the probability that
• The Asset and Liability Committee (ALCO ) reviews, recommends, obligors within a specific rating grade or for a particular pool of
and approves policy frameworks pertaining to capital manage- exposures will default within a one-year period
ment, structural interest rate risk management, funds transfer • LGD : An estimated percentage of EAD that is expected to be lost
pricing, liquidity and funding and subsidiary governance in the event of default of an obligor
• The Ethics and Compliance Committee directly supports our • EAD : An estimated dollar value of the expected gross exposure of
management of regulatory, compliance and reputation risk a facility upon default of the obligor before specific provisions or
• The Policy Review Committee acts as the senior risk approval partial write-offs.
authority relating to policies, products and services
• The Structured Transactions Oversight Committee reviews With respect to trading market risk, we use a statistical technique
structured transactions and complex credits known as Value-at-Risk to measure expected loss. It is a generally
• The USA Corporate Governance Committee is responsible for all accepted risk management concept that uses statistical models to
corporate governance matters of our U.S. operations. estimate within a given level of confidence the maximum loss in mar-
ket value we would experience in our trading portfolio from an adverse
GRM and Corporate Treasury one-day movement in market rates and prices. For further details, refer
GRM works in full partnership with our businesses to identify, assess, to the Market risk section.
mitigate and monitor all forms of risk. Together with the CEO and other
members of GE , the Chief Risk Officer ( CRO ) and GRM are primarily Unexpected loss and Economic Capital
responsible for the promotion of our risk management culture. The Unexpected loss is a statistical estimate of the amount by which
CRO and GRM responsibilities include: actual losses can exceed expected loss over a specified time horizon,
• Establishing comprehensive risk identification and approval measured at a specified level of confidence. On an enterprise-wide
processes basis, we use Economic Capital to estimate the unexpected loss asso-
• Establishing appropriate methodologies for risk measurement ciated with our business activities. We calculate Economic Capital
by estimating the level of capital that is necessary to cover risks con-
sistent with our desired solvency standard and desired debt rating.
Royal Bank of Canada: Annual Report 2007 81
Management’s Discussion and Analysis
The use of Economic Capital as a risk measure enables us to assess developed to ensure that our products and services are subject
performance on a comparable risk-adjusted basis at the transaction to a broad and robust review and approval process that fully
and portfolio levels. For further information, refer to the Capital man- considers associated risks, while striving to facilitate business
agement section. opportunities
• Transactions: We ensure that risk assessment processes are in
Sensitivity analysis and stress testing place for the review and approval of all types of transactions,
Sensitivity analysis and stress testing help us ensure that the risks we including credit transactions
take remain within our risk appetite and that our level of capital • Structured Transactions and Complex Credits: The Structured
remains adequate. Under sensitivity analysis, model inputs and Transactions Oversight Committee reviews new structured
assumptions are varied to assess how significantly the risk measure products and transactions with significant reputation, legal,
changes. Stress testing helps us determine the effects of potentially accounting, regulatory or tax risks.
extreme market volatility on our portfolios. Stress scenarios are con-
servatively based on unlikely but possible adverse market events and Authorities and limits
economy-wide developments. The Board of Directors, through the CR&RPC , delegates the setting
of credit, market and insurance risk limits to the CEO, Chief Operating
Model validation Officer ( COO ) and CRO. These delegated authorities allow these offi-
To ensure robustness of our measurement techniques, model validation cers to set risk tolerances, approve geographic (country and region)
is carried out by our risk professionals independent of those respon- and industry sector exposure limits within defined parameters, and
sible for the development and use of the models and assumptions. establish underwriting and inventory limits for trading and invest-
ment banking activities. These delegated authorities are reviewed and
Risk control approved annually by the Board of Directors and the CR&RPC . GRM is
Our enterprise-wide risk management approach is supported by a responsible for establishing:
comprehensive set of risk controls. This includes the development and • The criteria whereby these authorities may be further delegated
communication of policies, establishment of formal risk review and • The minimum requirements for documenting, communicating and
approval processes, and the establishment of delegated authorities monitoring the use of these delegated authorities.
and limits. The implementation of robust risk controls enables the opti-
mization of risk and return on both a portfolio and a transactional basis. CR&RPC must approve any transactions which exceed management’s
delegated authorities.
Risk policy architecture The Board of Directors through the Audit Committee approves
Our risk management frameworks and policies are structured into the risk limits for controlling liquidity and funding risk. These limits form
following four levels: part of our liquidity management framework and are a key risk control
Level 1: Enterprise Risk Management Framework: This framework designed to ensure that reliable and cost-effective sources of cash are
serves as the foundation of our risk management frame- available to satisfy our current and prospective commitments, both
works and policies, and sets the “tone at the top.” on- and off-balance sheet.
Level 2: Risk-Specific Frameworks: These individual frameworks
elaborate on each risk type and explain the following areas: Reporting
• Mechanisms for identifying, measuring, monitoring and Enterprise level risk monitoring and reporting is a critical component
reporting of risk of our enterprise risk management program and supports the ability of
• Key policies senior management and the Board of Directors to effectively perform
• Respective roles and responsibilities related to a their risk management and oversight responsibilities.
specific risk. Internal reporting is provided in the Enterprise Risk Report on
Level 3: Enterprise Risk Policies: These policies are considered our a regular basis with the purpose of ensuring senior management and
minimum requirements for our business segments, GTO and the Board of Directors receive timely and actionable forward-looking
Global Functions with respect to various risk types. risk reporting on significant risk issues impacting our organization.
Level 4: Business Segments and GTO Specific Policies and We also have individual risk-specific reporting, which aligns with
Procedures: These policies and procedures are established governance and relevant laws and regulations. Annually, the CRO
by the business segments and GTO to manage the risks that provides the Board of Directors with a comprehensive review of
are unique to their operations. emerging risks facing the organization as a whole as well as those
facing the business segments. External reporting is provided as
Risk review and approval processes required by law and other relevant regulations. Regular reporting on
Our risk review and approval processes are established by GRM based risks is provided to stakeholders including regulators, external ratings
on the nature, size and complexity of the risk involved. In general, agencies and analysts.
the risk review and approval process involves a formal review and
approval by an individual, group or committee that is independent Basel II
from the originator. The approval responsibilities are governed by As at November 1, 2007, we have implemented Basel II, which more
delegated authorities based on the following four categories: closely aligns regulatory capital requirements with our underlying risk
• Projects and Initiatives: Documentation of risk assessment is profile and internal risk management practices compared to Basel I.
formalized through the requirement that each Project Basel II represents a major change in bank regulations, in that it allows
Appropriation Request ( PAR) be reviewed and approved by GRM banks to select from a menu of approaches to calculate the minimum
and Global Functions capital required to support the credit risk and operational risks they
• New Products and Services: The policies and procedures for the undertake.
approval of new or amended products and services have been
82 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Credit risk Measurement Approach ( AMA ). We have elected to implement the
The Office of the Superintendent of Financial Institutions Canada (OSFI) more sophisticated risk management and governance practices
expects each major bank in Canada to adopt the Advanced Internal that are required under AMA , but will initially use the Standardized
Ratings Based ( AIRB ) Approach for all of its material portfolios, Approach for the calculation of operational risk capital.
although some flexibility is permitted regarding the timing of adop- The Standardized Approach provides the benefits of sounder
tion. For further details, refer to the Capital management section. Once operational risk management and governance, positioning us to
our AIRB internal ratings systems have been approved by the OSFI, we migrate to AMA once advances in measurement capabilities war-
are permitted to assess the credit risk of our exposures using our inter- rant the adoption of a model-based calculation approach. The OSFI
nal rating systems, and to employ the risk measurements produced by fully endorses this strategy of focusing on sound management of
those ratings systems in the calculation of required regulatory capital. operational risk while working towards more advanced measurement
capabilities.
Operational risk
The OSFI has been less prescriptive with respect to the calcula- Market risk
tion of capital for operational risk. The two options available to us Basel II treatment of market risk is unchanged from the treatment
under Basel II are the Standardized Approach and the Advanced under Basel I.
Risk Pyramid The base of the pyramid – The risk categories along the base of the
We use a pyramid to identify and categorize our risks. These risks are Risk Pyramid are those over which we have the greatest level of control
organized vertically within the Risk Pyramid to reflect the degree of and influence. These are credit, market, liquidity and funding, and
controllability. The Risk Pyramid provides us with a common language insurance risks. Operational risk, while still viewed as one of the
and discipline for the identification and assessment of risk in our risks over which we have the most control and influence, is ranked
businesses, products, initiatives, acquisitions and alliances. The Risk on a higher level than the other highly controllable risks. This ranking
Pyramid is reviewed regularly to ensure that all key risks are reflected acknowledges the level of controllability associated with people,
and ranked appropriately. systems and external events.
The middle of the pyramid – Strategic and reputation risks, while more
controllable than the risks at the top of the pyramid, are considered
less controllable compared to the risks at the base of the pyramid.
Systemic
Strategic risk arises in one of two situations: (i) we choose the wrong
strategy, or (ii) we choose the right strategy, but execute it poorly.
Regulatory Reputation risk is placed in the middle of the pyramid to denote the fair
and Legal Competitive degree of control and influence we can use to manage this risk type,
which generally occurs in connection with other risks, primarily regula-
nce
Mo
lue
tory and legal, and operational risks.
re
Strategic
con
inf
nd
tro
la
la
The top of the pyramid – Systemic risk is placed at the top of the Risk
tro
nd
on
inf
Pyramid, which is the least controllable and typically cannot be man-
sc
Reputation
lue
Les
aged through any type of direct mitigation efforts, such as risk limits
nce
and/or portfolio diversification. Regulatory and legal and competi-
tive risks, which can be viewed as somewhat controllable, can be
Operational
influenced through our role as a corporate entity, and as an active par-
ticipant in the Canadian and global financial services industry.
Liquidity
Credit Market and Insurance
Funding
Credit risk
Credit risk is the risk of loss associated with a counterparty’s inability credit products and services to clients, such as short-term
or unwillingness to fulfill its payment obligations. Credit risk may be investments relating to liquidity management and insurance business
direct (issuer, debtor, obligor or policyholder) or indirect to a investment activities.
secondary obligor (guarantor or reinsurer). Our credit offerings are a significant driver of overall business
We offer a wide range of credit products and services to performance. The failure to effectively manage credit risk across the
individual and business clients within Canada, the United States and in organization and all products, services and activities can have a direct,
numerous countries. Core products offered include loans, residential immediate and material impact on our earnings and reputation.
and commercial mortgages, credit cards, lines of credit and letters Our credit risk management principles are guided by the six
of credit. Specialized credit services include asset-backed financing, overall risk management principles discussed in the Risk management
margin lending, securities lending and project finance. The majority of overview section. In particular, the following two principles are com-
our businesses offer credit products and services. Credit risk is also plemented by the items below with respect to credit risk management.
incurred through other activities not directly linked to the provision of
Royal Bank of Canada: Annual Report 2007 83
Management’s Discussion and Analysis
The effective balancing of risk and return is achieved through: Our business activities are conducted with the view of not risking
• Ensuring that credit quality is not compromised for growth our reputation. Therefore, there are certain types of clients and trans-
• Diversifying credit risks in transactions, relationships and actions that we avoid in order to maintain our reputation, such as:
portfolios • Financing the manufacture of equipment or material for nuclear,
• Using our credit risk rating and scoring systems, policies chemical or biological warfare and landmines
and tools • Financing of Internet gambling businesses
• Pricing appropriately for the credit risk taken • Granting credit to entities subject to economic sanctions
• Applying consistent credit risk exposure measurements • Credit transactions that facilitate illegal activity, or contribute to
• Mitigating credit risk through preventive and detective controls misleading financial statements or regulatory reporting
• Transferring credit risk to third parties where appropriate • Credit transactions involving undocumented agreements,
through approved credit risk mitigation techniques, including disbursements or funds transfers
hedging activities and insurance coverage. • Granting credit to a business or individual engaged in activities
inconsistent with generally accepted standards of ethical
behaviour in the community.
Responsibilities
We deem credit risk management to be an enterprise-wide activity. The following provides a high-level overview of the key committees involved in
the management of credit risk.
Board of Directors and Conduct Review & Risk Policy Committee
• Shapes and influences credit risk culture; approves credit risk appetite.
• Ensures that management has in place frameworks, policies, processes and procedures to manage credit risk (including approval authority
for Credit Risk Management Framework and key enterprise-wide credit risk policies), and evaluates our effectiveness in managing credit risk.
• Approves credit risk limits, delegates approval authorities to the CEO, COO, CRO, and approves credit transactions in excess of management’s
authorities.
• Reviews enterprise-wide credit reporting, significant exposures and exceptions to limits.
Group Risk Committee
• Ensures credit risk profile is consistent with strategic objectives.
• Ensures that there are ongoing, appropriate and effective risk management policies, processes and procedures to manage credit risk (including
recommending the Credit Risk Management Framework and key enterprise-wide credit risk policies to the Board of Directors for approval).
• Approves credit policies and products with significant risk implications, as referred by the CRO.
• Recommends credit transactions in excess of management’s authority to the Board of Directors for approval.
• Reviews enterprise-wide credit reporting, significant exposures and processes, and ensures that appropriate and timely information is
provided to the Board of Directors on matters relating to credit risk and its management.
Policy Review Committee Structured Transactions Oversight Committee
• Reviews and recommends approval of the Credit Risk • Provides risk oversight of structured transactions and complex
Management Framework. credits, including identification and mitigation of risks.
• Approves enterprise-wide credit risk policies. • Reviews and approves products and transactions referred to it
• Approves new and amended business specific credit risk policies in accordance with our policies.
and products with significant risk implications.
Risk measurement Credit risk rating systems are designed to assess and quantify
Given the potential for credit risk to significantly impact our earnings, the risk inherent in credit activities in an accurate and consistent
it is critical that we accurately quantify credit risk at both the individual manner. We use a two-dimensional rating system for both wholesale
obligor and portfolio levels. This allows us to effectively estimate and retail credit exposures.
expected credit losses and minimize unexpected losses in order to
manage and limit earnings volatility. Wholesale credit portfolio
Our credit risk exposures are classified as wholesale and retail The wholesale credit risk rating system is designed to measure and
portfolios, and we employ different risk measurement processes for identify the risk inherent in our credit activities in an accurate and
each portfolio. The wholesale portfolio comprises business, sovereign consistent manner along two dimensions.
and bank exposures, which include mid-size to large corporations In the first dimension, each obligor is assigned a borrower risk
and certain small businesses that are managed on an individual client rating ( BRR ), which reflects an assessment of the credit quality of the
basis. The retail portfolio is comprised of residential mortgages and obligor. Each BRR has a probability of default ( PD ) assigned to it. This
personal, credit card and small business loans, which are managed on PD is an estimate of the probability that an obligor with a certain BRR
a pooled basis. This categorization of exposures is consistent with will default within a one-year time horizon. The BRR differentiates the
Basel II guidelines, which require banks to disclose their exposures riskiness of obligors and represents our evaluation of the obligor’s
based on how they manage their business and risks. ability and willingness to meet its contractual obligations despite
84 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
adverse or stressed business conditions, troughs in the business (employment status), data from our own systems (loan information)
cycle, economic downturns or unexpected events that may occur. The and information from external sources (credit bureaus).
assignment of BRRs is based on the evaluation of obligors’ business Behavioural scoring is used in the ongoing management of retail
and financial performance against several risk factors. We use Risk clients with whom we have an established relationship. It utilizes
Criteria Papers, which present a structured process for the consistent statistical techniques that capture past performance to predict future
identification and analysis of material information needed to assess behaviour and incorporate information such as cash flow and bor-
obligors in various industry sectors. Generally, the key risk factors rowing trends, as well as the extent of our relationship with the client.
assessed include industry, markets, firm competitiveness, company The behavioural risk score is dynamic and is generally updated on a
strategy and management quality, financial performance and access monthly basis to continually re-evaluate the risk. Characteristics used
to funds. Risk Criteria Papers provide guidance on what to emphasize in behavioural scoring models are based on information from existing
in the analysis of companies within an industry sector, and provide accounts and lending products for each client, and from information
weightings, which may vary from industry to industry. Our internal risk obtained from external sources, such as credit bureaus.
ratings are reviewed at least on an annual basis. For overall portfolio management, retail exposures are assessed
Our rating system is largely consistent with that of external rat- on a pooled basis, with each pool consisting of exposures that possess
ing agencies. The following table provides a mapping of our 22-grade similar homogeneous characteristics. Pooling of exposures allows for
internal risk ratings compared to ratings by external rating agencies. more precise and consistent estimates of default and loss character-
istics. Criteria used to pool exposures for risk quantification include
behavioural score product type (mortgage, credit cards, lines of
Internal ratings map Table 46
credit and installment loans), collateral type (chattel, liquid assets and
Moody’s Investors real estate) and the delinquency status (performing, delinquent and
Rating Standard &Poor’s Service Description default) of the exposure. Regular monitoring and periodic adjustments
1 to 4 AAA to AA- Aaa to Aa3 and alignments are conducted to ensure that this process provides for a
5 to 7 A+ to A- A1 to A3 Investment Grade
meaningful differentiation of risk. It also allows the grouping of homo-
geneous exposures from a risk perspective and permits accurate and
8 to 10 BBB+ to BBB- Baa1 to Baa3
consistent estimation of loss characteristics at the pool level. Migration
11 to 13 BB+ to BB- Ba1 to Ba3 between the pools is considered when assessing credit quality.
14 to 16 B+ to B- B1 to B3 Non-investment Grade The pools are assessed in two dimensions: PD and LGD. The
estimation of PD and EAD considers both borrower and transaction
17 to 20 CCC+ to CC Caa1 to Ca
characteristics, including behavioural credit score, product type and
21 to 22 C to D C to Bankruptcy Impaired/Default delinquency status. The LGD is estimated based on transaction speci-
fied factors, including product and collateral types. Our risk ratings are
In the second dimension, loss given default ( LGD ) represents the reviewed and updated on a regular basis.
portion of exposure at default ( EAD ) expected to be lost when an obli- The following table maps PD ranges to various risk levels:
gor defaults. LGD rates are largely driven by factors such as seniority
of debt, collateral security, client type, and the industry in which the Internal ratings map Table 47
obligor operates. EAD represents an estimate of the expected gross
PD bands Description
exposure of a credit facility at the time of default of the obligor. At
default the obligor may have drawn the facility fully or have repaid 0.0% –1.0% Low Risk
some of the principal. We estimate EAD based on the outstanding 1.1% –6.4% Medium Risk
por tion and an estimated amount of the undrawn portion that is
6.5% –99.99% High Risk
expected to be drawn at the time of default. The estimation of these
parameters represents a critical part of our credit rating system. It 100.00% Impaired/Default
is a process of quantifying the risk associated with obligors and the
related facilities by estimating and assigning values to the parameters.
Validation
Parameter estimations are based on historical internal experience, and
We ensure that our credit risk rating systems and methodologies are
are benchmarked to external data where applicable. While PD is used
subject to independent validation on a regular basis. The validation
at the obligor level, LGD and EAD are estimated for the various credit
processes provide confirmation that our systems properly identify
facilities under that obligor.
factors that help discriminate risk, appropriately quantify risk, pro-
These ratings and risk measurements are used in the determina-
duce measures of risk that respond to changes in the macroeconomic
tion of our expected losses, unexpected losses as well as economic
and credit environments, and are consistent with regulatory require-
and regulatory capital. They are also used in the setting of risk limits,
ments and our ratings philosophy. Those responsible for performing
portfolio management and product pricing.
validation activities are functionally separate from the group whose
methodologies and processes are subject to validation.
Retail credit portfolio
We ensure that there is proper separation of responsibility
Credit scoring is the primary risk rating system for assessing obligor
between (i) transaction origination and approval which takes place
and transaction risk for retail exposures. Credit scoring is employed in
within the business segments, and (ii) design, development and main-
the acquisition of new clients (acquisition scoring) and portfolio
tenance of the risk rating methodologies, which takes place within
management of existing clients (behavioural scoring).
GRM . GRM is also responsible for estimating the three risk param-
Acquisition scoring models, which are used for underwriting
eters as described above. To ensure there is a proper segregation of
purposes, utilize established statistical methods of analyzing new
responsibilities, models developed within the business segments are
applicant characteristics and past performance to estimate future
approved by GRM .
credit performance. In model development, all accessible sources
of data are used and include information obtained from the client
Royal Bank of Canada: Annual Report 2007 85
Management’s Discussion and Analysis
The validation of risk parameter estimation for both wholesale • Credit Risk Approval includes credit risk limits and exceptions
and retail portfolios addresses the estimation process and the rea- • Credit Documentation focuses on documentation and
sonableness of the estimates used for the calculation of regulatory administration
capital. The following items are examined and assessed: • Credit Review and Deterioration includes monitoring and review
• Quantification methodologies and processes, as well as the • Credit Portfolio Management includes portfolio management
reasonableness of outputs and risk quantification.
• Relationship between historical experience and internally derived
parameter values that incorporate estimators’ expert judgment Approval of credit products and services
and external benchmarking Our products and services are subject to robust risk review and
• Sufficiency of data observations, the appropriateness of data approval processes. New or amended products and services must be
sources and data segmentation reviewed relative to all risk types, including credit risk, in our Risk
• Statistical significance and predictive power of the estimated Pyramid, and as the level of risk increases, a more senior level of
values. Levels of tolerance are defined and mapped against approval is required.
actual results, with deviations explicitly noted.
Credit risk limits
A combination of quantitative (statistical) and qualitative (non- Limits are used to ensure our portfolio is well diversified and within
statistical) validation methods is employed to ensure that our credit our risk appetite as approved by the Board of Directors. Our credit
risk rating system is valid. At a minimum, we adopt the following tech- limits are established at the following levels to ensure adequate diver-
niques intended to ensure that the validation process: sification and to reduce concentration risk:
• Examines relevant and material data available from internal • Single-name limits
and external sources, to establish a context for assumptions, • Underwriting risk
calculations and outputs • Geographic (county and region) limits
• Demonstrates that estimates are grounded in historical • Industry sector limits
experience • Product and portfolio limits.
• Provides reasonable predictors of future default and loss.
The Economic Capital limit is intended to work as a complement to
Detailed validation reports are produced for the assessment of risk the notional limits and, as such, single names must satisfy both limits.
rating methodology and risk parameter estimation. To ensure single-name credit risk exposure remains well under
regulatory thresholds, and concentration risk is prudently managed,
Economic Capital we have established (i) internal single-name credit risk exposure limits
Economic Capital is management’s estimate of the amount of equity as a percentage of total capital, which are lower than that required
required to underpin our risks. It is used in risk-based pricing decisions by the OSFI, and (ii) a broader and more conservative definition of
and profitability measurement to ensure an appropriate risk and return single-name credit risk exposure than that used by the OSFI. These
balance. Within our wholesale credit portfolio, it is also used in setting controls provide a significant buffer between our exposure tolerances
single-name and industry limits in order to manage concentration risk. and those of our regulators. Exceptions are monitored by GRM and
For further details, refer to the Capital management section. reported to the CRO, with requisite reporting to the CR&RPC in accor-
dance with its mandate.
Sensitivity and stress testing
Sensitivity and stress tests are used to determine the size of poten- Credit risk mitigation
tial losses related to various scenarios for the wholesale and retail We seek to mitigate our exposure to credit risk through a variety of
credit portfolios. While unexpected losses are, by nature difficult means, including structuring of transactions, collateral and credit
to quantify, we use stress testing, scenario and sensitivity analysis derivatives. The policies and processes that are in place regarding the
to better understand and mitigate unexpected credit losses. These monitoring of the effectiveness of our credit risk mitigation are dis-
activities serve to alert management to unlikely but possible adverse cussed below.
market events and economy-wide developments and implications on
overall capital adequacy. Scenarios for credit risk such as economic Structuring of transactions
or industry downturns, are chosen on the basis of being meaningful, Proper structuring of a credit facility is a key factor in mitigating risk at
representative of realistic potential events or circumstances, and rea- the transaction level and often includes the use of guarantees, secu-
sonably conservative. rity, seniority and covenants. We use credit policies and procedures
to set out requirements for structuring transactions. Product-specific
Risk control guidelines set out appropriate product structuring and client criteria.
Our enterprise-wide credit risk policies are developed, communi-
cated and maintained by GRM . These policies set out the minimum Collateral
requirements for the prudent management of credit risk in a variety of We generally require obligors to pledge collateral as security when
transactional and portfolio management contexts. we advance credit. This provides some protection in case of default.
Real estate, liquid assets, cash, bonds and government securities are
Credit risk policies examples of the collateral securities we accept. The extent of risk
Our credit risk policies have evolved over many years as the organiza- mitigation provided by collateral depends on the amount type and
tion has grown in geographic scope and product complexity, and have quality of the collateral taken. Specific requirements relating to col-
been refined based on experience, regulatory influences and innova- lateral valuation and management are documented in our credit risk
tions in risk management and are managed under six major categories management policies. GRM manages collateral positions through
as follows: a system, which maintains information according to counterparty.
• Credit Risk Assessment includes policies related to credit risk Valuations of collateral are based on various sources and are com-
analysis, risk rating, risk scoring and trading credit pared to our collateral positions.
• Credit Risk Mitigation includes credit structuring, collateral and
guarantees
86 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Credit derivatives counterparty. Our trading units provide GRM with all relevant details
We also mitigate risk through credit derivatives that serve to transfer of outstanding transactions, including itemized mark-to-market data.
the risk to a third party. These derivatives are also used as a tool to This data is used to monitor the amount of netting benefit recognized.
mitigate industry sector concentration and single name exposure. For further details, refer to Note 7 to our Consolidated Financial
Procedures are in place to ensure these hedges are efficient and Statements.
effective.
All derivative transactions supported by collateral are docu- Reporting
mented using industry-standard master agreements. Internal policies GRM provides a number of enterprise level credit risk reports to senior
have been developed for each jurisdiction in order to ensure the management and the Board of Directors so as to ensure that shifts
legal enforceability of the collateral arrangements. Cash and securi- in our credit risk exposure or negative trends in our credit profile are
ties held as collateral are held by us or by our authorized custodian. highlighted and appropriate actions can be taken where necessary.
Concentration within the collateral taken is minimal. An Enterprise Risk Report is distributed to the Board of Directors,
Credit valuation adjustments are made for derivative transac- Group Risk Committee and senior executives on a quarterly basis. The
tions which are exposed to changes in counterparty credit quality. report provides a dynamic overview of our risk profile, including trend-
Credit valuation adjustments are calculated at least once a month ing information and significant risk issues. It also includes analysis of
using internal models and GRM-approved methodology, which con- significant shifts in exposures, expected loss, Economic Capital and
sist of sophisticated mathematical algorithms. The reasonableness risk ratings. Large exposure subject to credit policy exceptions, as
of the level of valuation adjustments is independently verified on a well as significant counterparty exposure and downgrades are also
monthly basis. reported. Analysis is provided on a portfolio and industry basis and
Netting is a technique that can reduce credit exposure from includes the results of stress testing and sensitivity analysis.
derivatives and is generally facilitated through the use of master net- Separate business specific reports are also provided to senior
ting agreements. A master netting agreement provides for a single net management, who monitor the credit quality of their respective
settlement for all financial instruments covered by the agreement in portfolios and emerging industry or market trends.
the event of default on, or termination of, any one contract with the
Loans and acceptances by portfolio and industry Table 48
(C$ millions) 2007 2006 2005 2004 2003
Residential mortgages $ 109,745 $ 96,675 $ 91,043 $ 81,998 $ 75,790
Personal 48,743 44,902 41,045 36,848 32,186
Credit cards 8,322 7,155 6,200 6,456 4,816
Small business (1) 2,652 2,318 1,951 1,928 1,335
Retail $ 169,462 $ 151,050 $ 140,239 $ 127,230 $ 114,127
Business (2)
Agriculture 5,367 5,435 5,238 4,992 4,789
Automotive 3,285 2,958 2,545 2,370 2,346
Consumer goods 5,206 4,553 4,437 4,566 4,920
Energy 7,632 6,010 5,628 3,462 3,621
Non-bank financial services 4,245 2,588 1,892 935 1,120
Forest products 1,349 1,126 1,210 1,150 1,523
Industrial products 4,119 3,659 3,157 2,827 2,952
Mining and metals 2,301 1,072 543 511 987
Real estate and related 19,187 16,145 13,730 12,224 12,286
Technology and media 2,423 2,326 2,244 2,135 2,723
Transportation and environment 2,656 2,400 1,900 2,555 3,196
Other 17,583 15,586 14,772 12,319 11,894
Sovereign (3) 932 887 550 800 732
Bank 5,468 3,252 903 668 1,176
Wholesale $ 81,753 $ 67,997 $ 58,749 $ 51,514 $ 54,265
Total loans and acceptances $ 251,215 $ 219,047 $ 198,988 $ 178,744 $ 168,392
Total allowance for loan losses $ (1,493) $ (1,409) $ (1,498) $ (1,644) $ (2,055)
Total loans and acceptances, net of allowance for loan losses $ 249,722 $ 217,638 $ 197,490 $ 177,100 $ 166,337
(1) Includes small business exposure managed on a pooled basis.
(2) Includes small business exposure managed on an individual client basis.
(3) Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Credit portfolio analysis Residential mortgages were up $13 billion, or 14%, despite the
2007 vs. 2006 offsetting effect of $13 billion of securitization during the year. The
During 2007, our credit portfolio remained well diversified and con- increase was supported by continued solid housing market activities
tinued to show strong growth. Total loans and acceptances increased in Canada, relatively low interest rates in a historical context, and
$32 billion, or 15%, compared to the prior year, reflecting continued strong labour market conditions.
growth in both our retail and wholesale loan portfolios. Personal loans grew $4 billion, or 9%, primarily reflecting strong
growth in home equity lending in Canada, driven by continued solid
Retail credit portfolio housing market activities and favourable labour market conditions.
Retail loans increased $18 billion, or 12%, from a year ago, largely due Credit cards increased $1 billion, or 16%, reflecting successful
to solid growth across all categories in our Canadian loan portfolio. sales efforts and continued consumer spending.
Royal Bank of Canada: Annual Report 2007 87
Management’s Discussion and Analysis
Wholesale credit portfolio
Total loans and acceptances by credit portfolio (C$ billions)
Wholesale loans and acceptances were up $14 billion, or 20%, primar-
ily reflecting strong growth across various sectors, with the largest
increase in the Real estate and related, Bank and Energy sectors. Our 250 Small business
Real estate and related exposure increased $3 billion, largely attribut- treated as retail
200
able to continued strong property development activities in Canada. Credit cards
150
Our exposure to the Bank sector was up $2 billion, with widespread Personal
increases across Canada, the U.S. and Other International. Our expo- 100
Wholesale
sure to the Energy sector increased $2 billion, primarily reflecting 50
Residential
continued investments by companies related to electricity generation, 0 mortgages
as well as oil and gas exploration and production in Canada. 2003 2004 2005 2006 2007
Our portfolio remained well diversified and the overall mix did not
Five-year trend
change significantly from the prior year. The portfolio remained well
Over the last five years, total loans and acceptances continued to
balanced with residential mortgages comprising 44%, wholesale loans
grow. Compared to 2003, our portfolio increased $83 billion, or 49%,
33%, personal loans 19%, credit cards 3% and small business
driven by growth in both our retail and wholesale loan portfolios.
managed on a pooled basis 1%.
Retail loans grew $55 billion, or 48%, since 2003, largely
The portfolio grew across all geographic regions. The largest
reflecting strong growth in Canada across all categories, particularly
increase was in Canada, with broad-based growth across both our
residential mortgages and personal loans, notwithstanding mortgage
retail and wholesale loan portfolios on generally favourable economic
and credit card securitizations over the period. This growth reflected
conditions. Growth in business lending accounted for most of the
our continued focus on expanding our retail portfolios, underpinned
increase in the U.S. and Other International. For further details, refer to
by continued solid Canadian housing market activities, relatively low
Table 59 in the Additional financial information section.
interest rates and strong labour market conditions.
Our wholesale portfolio grew $27 billion, or 51%, since 2003. The
largest growth sectors were Real estate and related, Bank, Energy and
Non-bank financial services, primarily driven by strong loan demand
in Canada amid generally favourable economic conditions over the
period. The increase in Real estate and related exposure over the
period was largely due to relatively strong North American housing
markets combined with our U.S. acquisitions. While the U.S. housing
market had been relatively solid over the past few years, it slowed
down significantly in the latter part of 2007, which tempered loan
growth. Our exposure to the Energy sector increased $4 billion, largely
attributable to increased investments by companies related to oil and
gas exploration and production in Canada and the U.S.
Our portfolio in Canada continued to grow over the period,
underpinned by our extensive distribution capabilities and continued
product enhancement on the back of solid loan demand and gener-
ally favourable economic conditions. Our exposure in the U.S. and
Other International generally trended downward except for the last
three years, partly reflecting our strategic reduction in exposure to
risk sensitive sectors, a reduction in single-name concentrations and
our exit from non-core client relationships. With our successful stra-
tegic realignment in these areas, our exposure in the U.S. and Other
International increased since 2005, primarily reflecting our successful
market expansion initiatives, including acquisitions.
Credit derivatives position (notional amounts) (1) Table 49
2007 2006
Protection Protection Protection Protection
(C$ millions) purchased (2) sold (2) purchased (2) sold (2)
Portfolio management
Business
Automotive $ 379 $ – $ 272 $ 5
Consumer goods – 67 – 92
Energy 957 – 273 7
Non-bank financial services 1,161 – 441 –
Industrial products – – – 35
Mining and metals 591 – 95 –
Real estate and related 413 – – –
Technology and media 10 – 6 11
Transportation and environment 335 – 177 –
Other 472 119 520 142
Sovereign (3) 220 – – –
Bank 731 – 22 –
Total portfolio management $ 5,269 $ 186 $ 1,806 $ 292
(1) Comprises credit default swaps, total return swaps and credit default baskets.
(2) Net of offsetting protection purchased and sold in the amount of $261 million (2006 – $312 million).
(3) Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
88 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
2007 vs. 2006 The allowance for credit losses is maintained at a level that
Total credit derivatives protection purchased increased $3 billion from management believes is sufficient to absorb probable losses in both
the prior year. The credit protection bought was mainly related to the the on- and off-balance sheet portfolios. The allowance is evaluated
Non-bank financial services, Bank, Energy, and Mining and metals on a quarterly basis based on our assessment of problem accounts,
sectors, largely reflecting the acquisition of credit protection to mitigate recent loss experience and changes in other factors, including the
single-name concentration risks in our portfolio. Our credit protection composition and quality of the portfolio and economic conditions.
sold was down $106 million, or 36%, from a year ago. The decrease was The allowance is increased by the provision for credit losses (which
mainly related to Industrial products, Consumer goods, and Technology is charged to income) and decreased by the amount of write-offs
and media sectors largely reflecting unfavourable U.S. financial market net of recoveries. For further information, refer to the Critical account-
conditions. ing policies and estimates section and Note 1 to our Consolidated
Financial Statements.
Gross impaired loans and Allowance for credit losses
Loans are generally classified as impaired when there is no longer rea-
sonable assurance of timely collection of the full amount of principal
or interest.
Gross impaired loans continuity Table 50
2007 vs. 2006
(C$ millions, except percentage amounts) 2007 2006 Increase (decrease)
Gross impaired loans, beginning of year
Retail $ 383 $ 340 $ 43 13%
Wholesale 451 434 17 4
$ 834 $ 774 $ 60 8%
New impaired loans
Retail $ 926 $ 810 $ 116 14%
Wholesale 720 271 491 181
$ 1,646 $ 1,081 $ 607 56%
Repayment, return to performing status, sold and other
Retail $ (132) $ (144) $ 12 8%
Wholesale (340) (164) (218) (133)
$ (472) $ (308) $ (206) (67)%
Net impaired loan formations
Retail $ 794 $ 666 $ 128 19%
Wholesale 380 107 273 255
$ 1,174 $ 773 $ 401 52%
Write-offs
Retail $ (759) $ (623) $ (136) (22)%
Wholesale (109) (90) (19) (21)
$ (868) $ (713) $ (155) (22)%
Gross impaired loans, end of year
Retail $ 418 $ 383 $ 35 9%
Wholesale 722 451 271 60
Total gross impaired loans $ 1,140 $ 834 $ 306 37%
Key ratios
Gross impaired loans as a % of loans and acceptances .45% .38% n.m. 7 bps
Total net write-offs as a % of average net loans and acceptances .30% .25% n.m. 5 bps
n.m. not meaningful
Allowance for credit losses continuity Table 51
2007 vs. 2006
(C$ millions, except percentage amounts) 2007 2006 Increase (decrease)
Specific allowance
Balance, beginning of year $ 263 $ 282 $ (19) (7)%
Provision for credit losses 782 482 300 62
Write-offs (868) (713) (155) (22)
Recoveries 170 205 (35) (17)
Adjustments 4 7 (3) (43)
Specific allowance for credit losses, end of year $ 351 $ 263 $ 88 33%
General allowance
Balance, beginning of year $ 1,223 $ 1,286 $ (63) (5)%
Provision for credit losses 9 (53) 62 117
Adjustments (11) (10) (1) (10)
General allowance for credit losses, end of year $ 1,221 $ 1,223 $ (2) –
Allowance for credit losses $ 1,572 $ 1,486 $ 86 6%
Royal Bank of Canada: Annual Report 2007 89
Management’s Discussion and Analysis
2007 vs. 2006
Gross impaired loans and allowance for credit losses (C$ millions)
Total gross impaired loans (GIL) increased $306 million, or 37%, com-
pared to the prior year, primarily reflecting higher impaired loans in our
U.S. residential builder finance business triggered by the downturn in 2,400 1.20%
Gross impaired
the U.S. housing market. loans
1,800 .90%
Retail gross impaired loans increased $35 million, or 9%, from a ACL
year ago. The increase mainly reflected higher impairment in both U.S. 1,200 .60% GIL ratio*
and Canadian residential mortgages and small business loans com-
mensurate with portfolio growth in Canada, partially offset by lower 600 .30%
impaired Canadian personal loans. 0 .0%
Wholesale gross impaired loans increased $271 million, or 60%, 2003 2004 2005 2006 2007
compared to the prior year. The increase was largely attributable to
the Real estate and related sector, primarily reflecting higher impaired * GIL ratio: GIL as a percentage of loans and acceptances.
loans in our U.S. residential builder finance business as a result of the
downturn in the U.S. housing market. This was partially offset by lower Five-year trend
impaired loans in the Technology and media sector mainly due to the Gross impaired loans
favourable resolution of a particular impaired loan. Gross impaired loans trended downward from 2003 to 2006, and
Gross impaired loans as a percentage of loans and acceptances decreased $911 million, or 52%, primarily reflecting lower impair-
were .45% compared to .38% in the prior year, primarily reflecting ment in our wholesale loan portfolio. In 2007, gross impaired loans
higher impaired loans in our U.S. residential builder finance business. increased $306 million, or 37%, from the prior year, largely due to
For further details, refer to Table 60 in the Additional financial informa- higher impaired loans in our U.S. residential builder finance business
tion section. as a result of the downturn in the U.S. housing market.
Retail gross impaired loans remained relatively stable over the
Allowance for credit losses period. The increase in gross impaired loans in both U.S. and Canadian
Total allowance for credit losses increased $86 million, or 6%, from a residential mortgages, primarily due to portfolio growth, was largely
year ago, primarily reflecting increased specific allowance related to offset by a decrease in impairment in our Canadian personal loan port-
a weakening in credit quality of our U.S. residential builder finance folio over the period.
loan portfolio. Wholesale gross impaired loans generally trended downward
The specific allowance increased $88 million, or 33%, from the from 2003 to 2006, and decreased $613 million, or 46%. The decline
prior year. The increase was mainly driven by higher impaired loans in was across all geographic areas and most industry sectors, with the
our U.S. residential builder finance business, primarily reflecting the largest decrease in the Energy, Forest products, Transportation and
downturn in the U.S. housing market. environment, and Agriculture sectors due to generally favourable eco-
The general allowance remained relatively stable compared to nomic conditions over the period. In 2007, wholesale gross impaired
the prior year, as an increase in allowance mainly related to our U.S. loans increased significantly, largely reflecting higher impairment in
residential builder finance loan portfolio was offset by the impact of our U.S. residential builder finance business triggered by the downturn
a stronger Canadian dollar on the translated value of our U.S. dollar- in the U.S. housing market.
denominated allowance. The ratio of gross impaired loans as a percentage of loans and
acceptances declined significantly from 1.04% in 2003 to .38% in
2006, and increased to .45% in 2007, reflecting the factors discussed
above. For further details, refer to Table 60 in the Additional financial
information section.
Allowance for credit losses
Over the last five years, total allowance for credit losses of
$1,572 million in 2007, decreased $592 million, or 27%, from 2003,
primarily reflecting a reduction in specific allowance.
The specific allowance of $351 million in 2007 was down
$406 million, or 54%, compared to 2003. For the period 2003 to 2006,
the wholesale loan portfolio recorded the largest reduction in specific
allowance, and was broad-based across portfolios, industry sectors
and geographic regions. In 2007, specific allowance increased largely
resulting from a weakening in credit quality of our U.S. residential
builder finance loan portfolio driven by the downturn in the U.S. hous-
ing market.
The general allowance of $1,221 million in 2007 decreased
$186 million, or 13%, compared to 2003. The decrease was largely
due to the reversal of general allowance of $175 million and $50 million
in 2004 and 2006, respectively, largely reflecting improved credit
quality and economic conditions in those years.
90 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Provision for credit losses appropriate by management, as discussed in the Critical account-
The provision for credit losses is charged to income by an amount nec- ing policies and estimates section and Note 1 to our Consolidated
essary to bring the allowance for credit losses to a level determined Financial Statements.
Provision for (recovery of) credit losses Table 52
2007 vs. 2006
(C$ millions, except percentage amounts) 2007 2006 Increase (decrease)
Residential mortgages $ 13 $ 6 $ 7 117%
Personal 364 306 58 19
Credit cards 223 163 60 37
Small business (1) 34 29 5 17
Retail $ 634 $ 504 $ 130 26%
Business (2) $ 148 $ (22) $ 170 n.m.
Sovereign (3) – – – –
Bank – – – –
Wholesale $ 148 $ (22) $ 170 n.m.
Total specific provision for loan losses $ 782 $ 482 $ 300 62%
Total general provision $ 9 $ (53) $ 62 117%
Total provision for credit losses $ 791 $ 429 $ 362 84%
Specific PCL as a % of average net loans and acceptances .33% .23% n.m. 10 bps
(1) Includes small business exposure managed on a pooled basis.
(2) Includes small business exposure managed on an individual client basis.
(3) Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
n.m. not meaningful
2007 vs. 2006
Specific provision for credit losses (C$ millions)
Total provision for credit losses (PCL) increased $362 million, or 84%,
compared to the prior year, which had been at a cyclically low level,
and has trended up towards the historical average. The increase 1,000 .60%
Specific
reflected higher provisions for both our wholesale and retail loan PCL
750 .45%
portfolios, primarily reflecting portfolio growth and higher impaired PCL ratio*
loans in our U.S. residential builder finance business triggered by the 500 .30%
downturn in the U.S. housing market. Specific PCL as a percentage of
250 .15%
average net loans and acceptances increased from a year ago, largely
reflecting higher impaired loans in our U.S. residential builder finance 0 .0%
business. 2003 2004 2005 2006 2007
Specific PCL for retail loans was up $130 million, or 26%, from
a year ago. The increase was primarily attributable to higher provi- * PCL ratio: Specific PCL as a percentage of average net loans and acceptances.
sions in our credit cards and personal unsecured credit line portfolios,
largely reflecting higher loss rates and portfolio growth. Five-year trend
Specific PCL for wholesale loans increased $170 million over the During the period 2003 to 2005, specific provision for credit losses
prior year. The increase was largely attributable to our business port- generally trended downward, primarily reflecting a reduction in
folio mainly due to higher impaired loans in our U.S. residential builder provisions for our business loan portfolio. We recorded significant
finance business and higher write-offs in Canada. Lower recoveries in recoveries particularly in corporate loans in 2005 and 2006. In 2007,
our corporate loan portfolio this year also contributed to the increase specific provisions has trended up towards the historical average,
in provisions. mainly reflecting higher provisions for our business loan portfolio,
The general provision increased $62 million from a year ago, pri- largely due to increased impaired loans in our U.S. residential builder
marily reflecting a $50 million reversal of the general allowance related finance business, portfolio growth and higher write-offs in Canada.
to our corporate loan portfolio in the prior year. Higher provisions in Higher provisions in our personal loan and credit cards portfolios
our U.S. residential builder finance loan portfolio, largely reflecting due to higher loss rates and portfolio growth also contributed to the
a weakening in credit quality as a result of the downturn in the U.S. increase. The specific provision as a percentage of average net loans
housing market, also contributed to the increase. and acceptances broadly declined from 2003 to 2006, largely due to
a reduction in provisions for our business loan portfolio. The ratio
increased to .33% in 2007, primarily reflecting higher impaired loans in
our U.S. residential builder finance business. For further details, refer
to Table 61 in the Additional financial information section.
Royal Bank of Canada: Annual Report 2007 91
Management’s Discussion and Analysis
Market risk
Market risk is the risk of loss that may arise from changes in market approval authorities are established by the Board of Directors, upon
factors such as interest rates, foreign exchange rates, equity or com- recommendation of the CR&RPC, and delegated to senior management.
modity prices, and credit spreads. We are exposed to market risk in The independent oversight of trading market risk management
our trading activity and our asset/liability management activities. activities is the responsibility of Group Risk Management (GRM) –
The level of market risk to which we are exposed varies depending on Market and Trading Credit Risk, which includes major units in Toronto,
market conditions, expectations of future price and yield movements London, New York and Sydney. The Market and Trading Credit Risk
and the composition of our trading portfolio. group establishes market risk policies and limits, develops quantita-
tive techniques and analytical tools, vets trading models and systems,
Trading market risk maintains the Value-at-Risk (VaR) and stress risk measurement sys-
Trading market risk encompasses various risks associated with cash tems, and provides enterprise risk reporting on trading activities.
and related derivative products that are traded in interest rate, foreign This group also provides independent oversight on trading activities,
exchange, equity, credit and commodity markets. Trading market risk including the establishment and administration of trading operational
is comprised of the following components: limits, market risk and counterparty credit limit compliance, risk
• Interest rate risk is the potential adverse impact on our earnings analytics, and the review and oversight of non-traditional or complex
and economic value due to changes in interest rates. It is transactions.
composed of: (i) directional risk – arising from parallel shifts in Business segments are accountable for their market risks, work-
the yield curve, (ii) yield curve risk – arising from non-uniform ing in partnership with GRM to ensure the alignment between risk
rate changes across a spectrum of maturities, (iii) basis risk – appetite and business strategies.
resulting from an imperfect hedge of one instrument type by GRM – Market and Trading Credit Risk is responsible for the
another instrument type whose changes in price are not perfectly determination and reporting of regulatory and Economic Capital
correlated, and (iv) option risk – from changes in the value of requirements for market risk, and provides assurance to regulators
embedded options due to changes in prices or rates and their in regular filings on reporting accuracy, timeliness and the proper
volatility. Most financial instruments have exposure to interest functioning of statistical models within the approved confidence level.
rate risk.
• Foreign exchange rate risk is the potential adverse impact on our Risk measurement
earnings and economic value due to currency rate and precious We employ risk measurement tools such as VaR, sensitivity analysis
metals price movements and volatilities. In our proprietary posi- and stress testing. GRM uses these measures in assessing global
tions, we are exposed to the spot, forward and derivative markets. risk-return trends and to alert senior management to adverse trends
• Equity risk is the potential adverse impact on our earnings due or positions.
to movements in individual equity prices or general movements The majority of trading positions in foreign exchange, interest
in the level of the stock market. We are exposed to equity risk rate, equity, commodity and credit trading have capital calculated
from the buying and selling of equities and indices as principal in under an internal models approach while structured credit deriva-
conjunction with our investment banking activities and from our tives are calculated under the Standardized Approach. Also calculated
trading activities, which include tailored equity derivative prod- under the Standardized Approach for migration and default (specific)
ucts, arbitrage trading and relative value trading. risk are a limited set of interest rate products. These products and
• Commodities risk is the potential adverse impact on our earnings risks are not included in our global VaR.
and economic value due to commodities price movements and
volatilities. Principal commodities traded include crude oil, Value-at-Risk (VaR)
heating oil and natural gas. In our proprietary positions, we are VaR is a statistical technique that measures the worst-case loss
exposed to the spot, forwards and derivative markets. expected over the period within a 99% confidence level. Larger losses
• Credit spread risk is the general adverse impact on our earnings are possible, but with low probability. For example, based on a 99%
and economic value due to changes in the credit spreads associ- confidence interval, a portfolio with a VaR of $20 million held over one
ated with our holdings of instruments subject to credit risk. day would have a one in one hundred chance of suffering a loss greater
• Credit specific risk is the potential adverse impact on our earnings than $20 million in that day. VaR is measured over a 10-day horizon for
and economic value due to changes in the creditworthiness and the purpose of determining regulatory capital requirements.
default of issuers on our holdings in bonds and money market We measure VaR by major risk category on a discrete basis. We
instruments, and those underlying credit derivatives. also measure and monitor the effects of correlation in the movements
of interest rates, credit spreads, exchange rates, equity and commod-
We conduct trading activities over-the-counter and on exchanges in ity prices and highlight the benefit of diversification within our trading
the spot, forward, futures and options markets, and we offer struc- portfolio. This is then quantified in the diversification effect shown in
tured derivative transactions. Market risks associated with trading our Global VaR table on the following page.
activities are a result of market-making, positioning, and sales and As with any modeled risk measure, there are certain limitations
arbitrage activities in the interest rate, foreign exchange, equity, com- that arise from the assumptions used in VaR. Historical VaR assumes
modities, and credit markets. Our trading operations primarily acts as that the future will behave like the past. As a result, historical scenar-
a market maker, executing transactions that meet the financial require- ios may not reflect the next market cycle. Furthermore, the use
ments of our clients and transferring the market risks to the broad of a 10-day horizon VaR for risk measurement implies that positions
financial market. We also act as principal and take proprietary market could be unwound or hedged within 10 days but this may not be a
risk positions within the authorized limits granted by the Board of realistic assumption if the market becomes largely or completely
Directors. The trading book consists of cash and derivative positions illiquid. For example, this was observed for certain U.S. subprime-
that are held for short-term resale, taken on with the intent of benefit- related securities since August 2007. VaR is calculated based on
ing in the short-term from actual or expected differences between their end-of-day positions.
buying and selling prices or to lock in arbitrage profits.
Validation
Responsibilities To ensure VaR effectively captures our market risk, we continuously
Oversight of market risk is provided by the Board of Directors through monitor and enhance our methodology. Daily back-testing serves to
the Conduct Review & Risk Policy Committee (CR&RPC). Market risk limit compare hypothetical profit or loss against the VaR to monitor the
statistical validity of 99% confidence level of the daily VaR measure.
92 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Back-testing is calculated by holding position levels constant and Risk control
isolating the effect of the movement of actual market rates over the Policies
next day and over the next 10 days on the market value of the port- A comprehensive risk policy framework governs trading-related risks
folios. Intra-day position changes account for most of the difference and activities and provides guidance to trading management, middle
between theoretical back-testing and actual profit and loss. VaR models office compliance functions and operations. We employ an extensive
and market risk factors are independently reviewed periodically to set of principles, rules, controls and limits, which conform to industry
further ensure accuracy and reliability. In 2007, there were five occur- best practice. Our market risk management framework is designed
rences of a back-test exceeding VaR. This occurred during the volatile to ensure that our risks are appropriately diversified on a global basis.
markets of July and August. VaR calculated using a historical window Limits on measures such as notional size, term and overall risk are
can lead to back-testing breaches when the historical window used in monitored at the desk, and at the portfolio and business levels.
the calculation is less volatile than current markets. During this period,
we frequently updated our scenarios to keep pace with current Reporting
market events. Reports on trading risks are provided by GRM – Market and Trading
Credit Risk to the Chief Risk Officer ( CRO ) and the operating committee
Sensitivity analysis and stress testing of Capital Markets on a weekly basis and to senior management on a
Sensitivity analysis is used to measure the impact of small changes in daily basis. Enterprise-wide reporting is used to monitor compliance
individual risk factors such as interest rates and foreign exchange rates against VaR and stress limits approved by the Board of Directors, and
and is designed to isolate and quantify exposure to the underlying risk. the operating limits derived from these board limits. In addition to
VaR is a risk measure that is only meaningful in normal market con-
this monitoring, GRM – Market and Trading Credit Risk pre-approves
ditions. To address more extreme market events, stress testing is used
excesses and reports any breach to the CRO and the operating commit-
to measure and alert senior management to our exposure to potential
tee of Capital Markets.
political, economic or other disruptive events. We run several types
Internal reporting to senior management includes stand-alone
of stress testing, including historical stress events such as the 1987
risk calculations for portfolios that have standardized regulatory capi-
stock market crash, as well as hypothetical “what-if” stress events that
tal which are then combined with models-based results to present an
represent potential future events that are plausible but have a very low
aggregated enterprise risk profile.
probability of occurring. Our stress scenarios are reviewed and updated
The following table shows our global VaR for total trading
as required to reflect relevant events and hypothetical situations.
activities under our models based approach for capital by major risk
While we endeavour to be conservative in our stress testing, there can
category and also shows the diversification effect, which is calculated
be no assurance that our stress testing assumptions will cover every
as the difference between the global VaR and the sum of the separate
market scenario that may unfold.
risk factor VaRs.
Global VAR by major risk category Table 53
2007 2006
For the year ended October 31 For the year ended October 31
As at As at
(C$ millions) Oct. 31 High Average Low Oct. 31 High Average Low
Equity $ 8 $ 18 $ 9 $ 4 $ 7 $ 11 $ 7 $ 5
Foreign exchange 4 7 2 1 2 4 2 1
Commodities 2 2 1 – 1 2 1 –
Interest rate 20 23 19 14 13 20 13 9
Credit specific 3 5 3 2 3 4 3 2
Diversification (19) n.m. (13) n.m. (9) n.m. (8) n.m.
Global VAR $ 18 $ 27 $ 21 $ 16 $ 17 $ 25 $ 18 $ 13
n.m. not meaningful
Global VaR by major risk category (C$ millions)
0
-3
-6
-9
-12
-15
-18
-21
-24
November February May August October
2006 2007 2007 2007 2007
Daily interest rate VaR Daily equity VaR Daily commodities VaR Daily credit specific risk VaR Daily foreign exchange VaR
Global VaR Trading revenue
2007 vs. 2006 2007 vs. 2006
Average global VaR for the year of $21 million was up compared to The volatility in daily trading revenue in the latter part of 2007 reflected
$18 million a year ago. This increase largely reflected an increase difficult trading conditions in both interest rates and credit-related
in both Interest rate and Equity VaR due to a higher level of trading products arising from a very stressed market during that period. Equity
activity and increased market volatility during the current year. These markets also experienced high volatility in July and August. Writedowns
increases were mostly offset by an improvement in the overall diversi- related to the valuation of U.S. subprime RMBS and CDOs of ABS in our
fication effect, which rose to 38% compared to 31% a year ago. Structured Credit business totalled $357 million. In addition to this
Royal Bank of Canada: Annual Report 2007 93
Management’s Discussion and Analysis
one-day trading loss, we experienced 25 days of net trading losses with
the largest one-day loss of $23 million.
Daily net trading revenue and global VaR (1), (2) (C$ millions) Histogram of daily net trading revenue (1), (2) (number of days) Daily
60 24 60
50 50
40 40
30 16 30
20 20
10 10
0 8 0
-10 -10
-20 -20
-30 0 -30
60 -334 -30 -10 0 10 30 60
-340 -340
Daily net trading revenue (C$ millions)
November February May August October Nove
2006 2007 2007 2007 2007 20
Daily net trading revenue Global VaR Da
(1) Trading revenue on a taxable equivalent basis excluding revenue related to consolidated VIEs.
(2) The $357 million writedown on the valuation of U.S. subprime RMBS and CDOs of ABS was included on October 31, 2007.
Non-trading market risk (Asset/liability management) Funds transfer pricing trading revenue (1) (number of days)
Histogram of daily net
Traditional non-trading banking activities, such as deposit taking We use a funds transfer pricing mechanism at the transaction level
6
and lending, expose us to market risk, of which interest rate risk is the to transfer interest rate risk to Corporate Treasury and identify the
largest component. profitability of various products. The funds transfer pricing rates are
Our goal is to manage the interest rate risk of the non-trading market-based and are aligned with interest rate risk management prin-
balance sheet to a target level. We modify the risk profile of the ciples. They are supported by empirical research into client behaviour
4
balance sheet through proactive hedging to achieve our target level. and are an integral input to the retail business pricing decisions.
For additional information regarding the use of derivatives in asset We also focus on developing retail product valuation models that
and liability management, refer to the Off-Balance sheet section and incorporate the impact of consumer behaviour. These valuation
Note 7 to our Consolidated Financial Statements. We continually moni- models are typically derived through econometric estimation of
2
tor the effectiveness of our interest rate risk mitigation activity within consumer exercise of options embedded in retail products. The most
Corporate Treasury on a value and earnings basis. significant embedded options are mortgage rate commitments and
For a discussion of the management of foreign exchange risk in prepayment options. In addition, we model the sensitivity of the value
the non-trading balance sheet, refer to the Hedging foreign currency- of0deposits with an indefinite maturity to interest rate changes.
45 denominated operations discussion in the Capital management section. -30 -15 0 15 30 45
Validation trading revenue (C$ millions)
Daily net
Responsibilities We supplement our assessment by measuring interest rate risk for
While our individual subsidiaries and business segments manage a range of dynamic and static market scenarios. Dynamic scenarios
the daily activities, Corporate Treasury is responsible for managing our simulate our interest income in response to various combinations of
enterprise-wide interest rate risk, monitoring approved limits and com- business and market factors. Business factors include assumptions
pliance with policies and operating standards. Our Asset and Liability about future pricing strategies and volume and mix of new business,
Committee (ALCO ) provides oversight to Corporate Treasury and whereas market factors include assumed changes in interest rate
reviews the policy developed by Corporate Treasury and provides levels and changes in the shape of the yield curve. Static scenarios
recommendations to CR&RPC for approval. supplement dynamic scenarios and are employed for assessing the
risks to the value of equity and net interest income.
Risk measurement As part of our monitoring of the effectiveness of our interest rate
We endeavour to keep pace with best practices in instrument risk mitigation activity within Corporate Treasury which is done on a
valuation, econometric modeling and new hedging techniques on an value and earnings basis, model assumptions are validated against
ongoing basis. Our investigations range from the evaluation of tradi- actual client behaviour.
tional asset/liability management processes to pro forma application
of recent developments in quantitative methods. Risk control
Our risk position is measured daily, weekly or monthly based on Policies and limits
the size and complexity of the portfolio. Measurement of risk is based The interest rate risk policies define the management standards
on rates charged to clients as well as funds transfer pricing rates. Key and acceptable limits within which risks to net interest income over
rate analysis is utilized as a primary tool for risk management. It pro- a 12-month horizon, and the economic value of equity, are to be
vides us with an assessment of the sensitivity of the exposure of our contained. These ranges are based on immediate and sustained
economic value of equity to instantaneous changes in individual points ±100 basis point parallel shift of the yield curve. The limit for net
on the yield curve. interest income risk is 3% of projected net interest income, and for
The economic value of equity is equal to the net present value of economic value of equity risk, the limit is 5% of projected common
our assets, liabilities and off-balance sheet instruments. equity. Interest rate risk policies and limits are reviewed and approved
annually by the Board of Directors.
94 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Risk reporting An Enterprise interest rate risk report is reviewed monthly by
The individual subsidiaries and business segments report the interest the ALCO and quarterly by the Group Risk Committee and the Board
rate risk management activity on a monthly basis. They must also of Directors.
immediately report any exceptions to the interest rate risk policies to
Corporate Treasury and seek approval of the corrective actions.
Market risk measures – Non-trading banking activities Table 54
2007 2006 2005
Economic value of equity risk Net interest income risk
Canadian U.S. Canadian U.S. Economic Economic
dollar dollar All dollar dollar All value Net interest value Net interest
(C$ millions) impact impact (1) currencies impact impact (1) currencies of equity risk income risk of equity risk income risk
Before-tax impact of:
100bp increase in rates $ (391) $ (49) $ (440) $ 40 $ 14 $ 54 $ (496) $ 87 $ (435) $ 106
100bp decrease in rates 315 (6) 309 (97) (14) (111) 375 (153) 291 (181)
Before-tax impact of:
200bp increase in rates (819) (111) (930) 68 29 97 (1,044) 147 (920) 162
200bp decrease in rates 640 (87) 553 (202) (29) (231) 658 (319) 461 (365)
(1) Represents the impact on the non-trading portfolios held in our U.S. banking operations.
2007 Analysis made by senior management and validated by empirical research.
The above table provides the potential before-tax impact of an imme- All interest rate risk measures are based upon interest rate exposures
diate and sustained 100 basis point and 200 basis point increase or at a specific time and continuously change as a result of business
decrease in interest rates on net interest income and economic value activities and our risk management initiatives. Over the course of
of equity of our non-trading portfolio, assuming that no further 2007, our interest rate risk exposure was well within our target level.
hedging is undertaken. These measures are based upon assumptions
Operational risk
Operational risk is the risk of loss resulting from inadequate or failed Risk measurement
internal processes, people and systems or from external events. Operational risk is difficult to measure in a complete and precise man-
Operational risk is embedded in all our activities, including the ner, given that exposure to operational risk is often implicit, bundled
practices and controls used to manage other risks. Failure to manage with other risks, or otherwise not taken on intentionally. In the banking
operational risk can result in direct or indirect financial loss, reputa- industry, measurement tools and methodologies continue to evolve.
tional impact, regulatory censure, or failure in the management of Nonetheless, we are able to gauge our operational risk exposure by
other risks such as credit or market risk. using several approaches concurrently.
Our operational risk management framework flows directly from
our enterprise risk management framework and sets out the principles Risk assessment
and practices that we use to manage operational risk by identifying, Operational risks are identified and their potential impact assessed
measuring, controlling, and monitoring and reporting it. During 2007, through our enterprise-wide integrated operational risk and control
we strengthened our operational risk management framework by assessment and monitoring program. Our operational risk management
expanding the common operational risk language that supports the framework is used to ensure consistent identification and assessment
consistent identification, assessment and understanding of risks. of operational risks and the controls used to manage these.
We also implemented our “converged” operational risk and control
assessment and monitoring program. This enterprise-wide program Risk indicators
integrated several stand-alone programs to identify and assess Our businesses and corporate support groups use a broad range
operational risks. of risk indicators to manage their day-to-day activities. GRM uses
indicators to monitor operational risk at the enterprise level. These
Responsibilities indicators provide insight into the level and composition of our
The Board of Directors is responsible for providing oversight and operational risk exposure and potential changes in these.
ensuring that appropriate policies have been implemented to man-
age operational risk. The Chief Risk Officer ( CRO ) and Group Risk Operational event data collection and analysis
Management ( GRM ) are responsible for implementing the operational Operational risk events are reported in a central enterprise database.
risk management framework on an enterprise-wide basis, as well as Comprehensive information about these events is then collected, and
for directing and approving significant area-specific operational includes information regarding amount, occurrence, discovery date,
risk policies. A dedicated team within GRM designs and supports business area and product involved, root causes and risk drivers.
operational risk policies, programs and initiatives, and monitors Analysis of operational risk event data helps us to understand where
implementation progress and ongoing execution. The businesses and how our risks are manifesting themselves, provides a historical
and corporate support groups are responsible for the informed and perspective of our operational risk experience, and establishes a basis
active management of the operational risks within their activities in for measuring our operational risk exposure and the capital needed to
accordance with the operational risk management framework. underpin this type of risk.
Where appropriate, execution of operational risk management
programs is conducted by GTO on behalf of the businesses and Industry loss analysis
corporate support groups. We review and analyze information on operational losses that have
occurred at other financial institutions, using published information
and information we acquire through our membership in the
Operational Riskdata eXchange ( ORX), a private data-sharing
Royal Bank of Canada: Annual Report 2007 95
Management’s Discussion and Analysis
consortium. Both provide insights into the size and nature of potential Risk mitigation
exposures, which enables us to benchmark our loss experience Any high-risk exposures that we identify are subject to remedial
against those of our peers to determine if our experience puts us in an measures, monitoring and control testing. This includes exposures
outlier position. It also allows us to monitor emerging developments identified through our integrated risk and control assessment and
and trends that affect the financial industry as a whole. monitoring program, internal audits, compliance reviews, business
continuity readiness reviews, or operational risk event reporting.
Risk control Our corporate insurance program enables us to transfer some
Operational risk is managed through our infrastructure, controls, of our operational risk exposure by purchasing insurance coverage,
systems and people, complemented by central enterprise-wide groups the nature and amounts of which are determined on a central,
focusing on management of specific operational risks such as fraud, enterprise-wide basis.
privacy, outsourcing, and business disruption, as well as people and
systems risks. Reporting
A number of our enterprise-wide groups ensure that all of these GRM provides quarterly enterprise level risk reporting to senior
controls and systems are effective under our operational risk manage- management and the Board of Directors. The operational risk reporting
ment framework. These include compliance, which ensures a complete includes an overview of our operational risk profile and the trend and
view of our regulatory obligations and provides a co-ordinated, outlook for our exposure. Details are provided on areas of elevated
effective response to these, and the internal audit group, which pro- risk, individual operational risks where there is heightened awareness,
vides independent assessment of risk management practices, internal regulatory or compliance issues, and large operational risk events.
controls and corporate governance processes. This reporting is supplemented with more detailed specific reporting
by groups such as compliance, audit, legal and human resources.
Liquidity and funding risk
Liquidity and funding risk is the risk that an institution is unable to and contingency plans and for recommending and monitoring
generate or obtain sufficient cash or its equivalent in a timely and cost- limits within the framework. In this role, Corporate Treasury is
effective manner to meet its commitments as they come due. assisted by Group Risk Management. Corporate Treasury actively
Our liquidity and funding management framework is designed to participates in national and international industry initiatives to
ensure that adequate sources of reliable and cost-effective cash or its benchmark and enhance its liquidity management practices.
equivalents are continually available to satisfy our current and prospec- • Treasury departments of business segments and key subsidiaries
tive financial commitments under normal and contemplated stress execute transactions in line with liquidity management policies
conditions. To achieve this goal, we are dedicated to the preservation of and strategies.
the following key liquidity and funding risk mitigation strategies: • Subsidiaries are responsible for managing their own liquidity
• A large base of core client deposits in compliance with policies and practices established under
• Continual access to diversified sources of wholesale funding, advice and counsel by Corporate Treasury and within governing
including demonstrated capacities to monetize specific asset regulatory requirements.
classes
• A comprehensive and enterprise-wide liquidity contingency plan Risk measurement
supported by an earmarked pool of unencumbered marketable The assessment of our liquidity position reflects management’s con-
securities (referred to as “contingency liquidity assets”) that servative estimates, assumptions and judgments pertaining to current
provide assured access to cash in a crisis. and prospective firm-specific and market conditions and the related
behaviour of our clients and counterparties. We measure and manage
Our liquidity and funding management practices and processes our liquidity position from three risk perspectives as follows:
reinforce these risk mitigation strategies by assigning prudential limits
or targets to metrics associated with these activities and regularly Structural liquidity risk
measuring and monitoring various sources of liquidity risk under both Structural liquidity risk management addresses the risk due to
normal and stressed market conditions. In managing this risk, we mismatches in effective maturities between assets and liabilities,
aim to achieve a prudent balance between the level of risk we take more specifically the risk of over-reliance on short-term liabilities to
and the cost of its mitigation, recognizing that this balance may fund longer-term illiquid assets. We use both the cash capital and
need to be adjusted if our internal and/or external environments survival horizon models to assist in the evaluation of balance sheet
change materially. liquidity and determination of the appropriate term structure of our
debt financing. These methodologies also allow us to measure and
Responsibilities monitor the relationship between illiquid assets and core funding,
The Board of Directors is responsible for oversight of our liquidity including our exposure to a protracted loss of unsecured wholesale
and funding management framework, which is developed and imple- deposits under stressed conditions.
mented by senior management.
• The Audit Committee approves our liquidity and funding man- Tactical liquidity risk
agement framework, our pledging framework, and liquidity Tactical liquidity risk management addresses our normal day-to-day
contingency plan and establishes broad liquidity risk tolerance funding requirements, which are managed by imposing prudential
levels, and the Board of Directors is informed on a periodic basis limits on net fund outflows in Canadian dollar and foreign currencies
about our current and prospective liquidity condition. for key short-term time horizons, as well as on our pledging activities
• The Group Risk Committee and our Asset and Liability Committee that are subject to an enterprise-wide framework that assigns a risk-
(ALCO) share management oversight responsibility for liquidity adjusted limit to our aggregate pledging exposure and individual limits
and funding policies and receive regular reports detailing compli- by types of pledging activities. Pledged assets include a pool of
ance with key limits and guidelines. eligible assets that are reserved exclusively to support our participa-
• Corporate Treasury has global responsibility for the develop- tion in payment and settlement systems.
ment of liquidity and funding management policies, strategies
96 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Contingent liquidity risk reviewed periodically to determine if they remain valid or changes to
Contingent liquidity risk management assesses the impact of and assumptions and limits are required in light of internal and/or external
our intended responses to sudden stressful events. The liquidity developments. Global market volatility in the latter part of 2007 has
contingency plan identifies comprehensive action plans that would be prompted us to modify the liquidity treatment of certain asset classes
implemented depending on the duration and severity of the various to reflect our expectations that market liquidity for these products
liquidity crises identified in our stress testing program. Corporate will be sporadic for some time. Some limits are in the process of being
Treasury maintains and administers the liquidity contingency plan. reviewed and possibly revised to take into consideration the results of
The Liquidity Crisis Team, consisting of senior representatives of all updated stress tests that reflect lessons learned during this period of
key business and functional units, meets regularly to engage in stress market volatility.
testing and to review our liquidity contingency preparedness.
Our stress testing exercises are based on models that measure Reporting
our potential exposure to global, country-specific or RBC-specific Detailed reports on our principal short-term asset/liability mismatches
events (or a combination thereof) and consider both historical and are monitored on a daily basis to ensure compliance with the limits for
hypothetical events. Different levels of severity are considered for overall group exposure and by major currency, branches, subsidiaries
each type of crisis including ratings downgrades of two and four and geographic locations. As set out in our liquidity and funding
notches and to non-investment grade for RBC-specific events. These management framework, any potential exceptions to established
comprehensive tests include elements of scenario and sensitivity limits on net fund outflows or other rules, whether monitored on a
stress testing techniques. In all cases, the crisis impact is measured daily, weekly, monthly or quarterly basis, are reported immediately
over a nine-week horizon, which is also used in our key measure of tac- to Corporate Treasury, which provides or arranges for approval after
tical liquidity risk and is what we consider to be the most crucial time reviewing a remedial action plan.
span for a liquidity event. Liquidity Crisis Team members contribute
to assumptions about the expected behaviour of balance sheet asset Funding
and liability categories and off-balance sheet exposures based on Funding strategy
their specialized client, product and market perspectives. Some tests Diversification of funding sources is a crucial component of our overall
are run monthly, others are only run annually. Frequency is determined liquidity management strategy. Diversification expands our funding
by considering a combination of their likelihood and impact. After flexibility while minimizing funding concentration and dependency and
reviewing test results, the liquidity contingency plan and other related generally reducing financing costs. To that effect, we completed the
liquidity and funding risk management practices may be modified first Canadian covered bond issuance in November 2007. Maintaining
in light of lessons learned. Failure to meet predetermined minimum competitive credit ratings is also critical to cost-effective funding. Core
targets in some of these tests, as well as in aforementioned risk mea- funding, comprising capital, longer-term liabilities and a diversified
sures, would result in discussion with senior management and, as pool of personal and, to a lesser extent, commercial deposits, is the
necessary, the Board of Directors, and possibly lead to revised limits foundation of our strong structural liquidity position.
and targets.
Our liquid assets are primarily a diversified pool of highly rated Credit ratings
marketable securities and include segregated portfolios (in both Our ability to access unsecured funding markets and to engage in
Canadian and U.S. dollars) of contingency liquidity assets to address certain collateralized business activities on a cost-effective basis is
potential on- and off-balance sheet liquidity exposures (such as primarily dependent upon maintaining competitive credit ratings. Our
deposit erosion, loan drawdowns and higher collateral demands), that credit ratings are largely determined by the quality of our earnings, the
have been estimated through models we have developed or by the adequacy of our capital and the effectiveness of our risk management
scenario analyses and stress tests that we conduct periodically. These programs. We estimate, based on periodic reviews of ratings triggers
portfolios are subject to minimum asset levels and strict eligibility embedded in our existing businesses and of our funding capacity
guidelines to ensure ready access to cash in emergencies. sensitivity, that a minor downgrade would not materially influence our
liability composition, funding access, collateral usage and associated
Risk control costs. However, a series of downgrades could have adverse conse-
We monitor and manage our liquidity position on a consolidated quences for our funding capacity, collateral requirements and on the
basis and consider legal, regulatory, tax, operational and any other results of our operations.
applicable restrictions when analyzing our ability to lend or borrow
funds between branches, branches and subsidiaries, and subsidiaries.
Credit ratings Table 55
Policies Short-term Senior long-
As at November 29, 2007 (1) debt term debt Outlook
Our principal liquidity and funding policies are reviewed and approved
annually by senior management committees and the Board of Moody’s Investors Service P-1 Aaa stable
Directors. These broad policies establish risk tolerance parameters Standard & Poor’s A-1+ AA– positive
Fitch Ratings F1+ AA stable
and authorize senior management committees or Corporate Treasury
DBRS R-1(high) AA stable
to approve more detailed policies and limits related to specific mea-
(1) Credit ratings are not recommendations to purchase, sell or hold a financial
sures, businesses and products. These policies and procedures govern obligation inasmuch as they do not comment on market price or suitability for a
management, measurement and reporting requirements and define particular investor. Ratings are subject to revision or withdrawal at any time by the
rating organization.
approved liquidity and funding limits.
Authorities and limits During the year, there were two positive developments with respect to
Targets for our structural liquidity position, based on both a “cash cap- our ratings. In the second quarter of 2007, Moody’s Investors Service
ital” metric and a “survivability horizon” measurement, are approved upgraded our senior long-term debt rating to Aaa from Aa2 as a result
at least annually and monitored regularly. of refinements made to their joint default analysis, and in the third
With respect to net short-term funding requirements, all limits quarter of 2007, Standard & Poor’s revised our rating outlook to posi-
are monitored regularly to ensure compliance. The prescribed treat- tive from stable, citing among other points, a sound liquidity profile and
ment of cash flow assets and liabilities under varying conditions are a very robust liquidity management infrastructure. Our Fitch and DBRS
Royal Bank of Canada: Annual Report 2007 97
Management’s Discussion and Analysis
ratings and outlooks remain unchanged from October 31, 2006. Our financial structure influence our long-term funding activities. We oper-
collective ratings continue to be the highest categories assigned by the ate debt issuance programs in Canada, the U.S., Europe, Australia and
respective agencies to a Canadian bank and these strong credit ratings Japan. Diversification into new markets and untapped investor seg-
support our ability to competitively access unsecured funding markets. ments is also constantly evaluated against relative issuance costs.
During 2007, we continued to expand our long-term funding base
Deposit profile by issuing, either directly or through our subsidiaries, $30.7 billion
The composition of our global deposit liabilities is summarized in of senior deposit notes in various currencies and markets. Total long-
Note 13 to our Consolidated Financial Statements. In 2007, personal term funding outstanding increased $18.2 billion. Outstanding senior
deposits remained the key source of funding for our Canadian dollar debt containing ratings triggers, which would accelerate repayment,
balance sheet while most foreign currency deposits originated from constitutes a very small proportion of our overall outstanding debt.
unsecured, wholesale sources, including large corporate and institu-
tional clients and foreign commercial and central banks. Other liquidity and funding sources
Our personal deposit franchise constitutes the principal source We use commercial mortgage, residential mortgage and credit card
of constant funding while certain commercial and institutional client receivable-backed securitization programs as alternative sources of
groups also maintain relational balances with low volatility profiles. funding and for liquidity and asset/liability management purposes.
Taken together, these clients represent a highly stable supply of core We hold retained interests in our residential mortgage and credit card
deposits in most conceivable environments as they typically are less securitization programs. Our total outstanding mortgage-backed
responsive to market developments than transactional lenders and securities sold increased year over year by $2.1 billion. Our credit
investors due to the impact of deposit insurance and extensive and, card receivables, which are financed through notes issued by a
at times, exclusive relationships with us. Core deposits, consisting of securitization special purposes entity, increased year over year
our own statistically derived estimates of the highly stable portions by $509 million. For further details, refer to the Off-balance sheet
of all of our relational personal, commercial and institutional balances arrangements section and Note 5 to our Consolidated Financial
(demand, notice and fixed-term) together with wholesale funds matur- Statements.
ing beyond one year, increased during the year by about 2% to 56%
of our total deposits. We encourage wholesale funding diversity and Impact of global market turmoil to our term funding capacity
regularly review sources of short-term funds to ensure that they are Despite recent global market events, including a reduction in liquidity
well-diversified by provider, product, market and geographic origin. In in term funding markets, our liquidity and funding position remains
addition, we maintain an ongoing presence in different funding mar- sound and adequate to execute our strategy. There are no known
kets, which allows us to constantly monitor market developments and trends, demands, commitments or events that are presently expected
trends in order to identify opportunities and risks and to take appropri- to materially change this position.
ate and timely actions. By leveraging our new and existing domestic and global funding
programs, we continued to raise wholesale term funding in size
during the latter half of 2007. Most of the funding was raised through
Term funding sources Table 56 large benchmark-sized transactions, but a significant amount was
(C$ millions) 2007 2006 2005 also raised in a variety of lower-cost funding transactions. In 2007, we
Long-term funding outstanding $ 51,540 $ 33,361 $ 24,004 raised wholesale term funding in 12 different currencies, including
Total mortgage-backed six currencies in the fourth quarter. The market turmoil did not prevent
securities sold 14,239 12,186 8,487 us from launching the first Canadian covered bond program, where
Commercial mortgage-backed we sold €2 billion of notes in the inaugural transaction, which settled
securities sold 2,405 1,914 1,237 on November 5, 2007. Our ability to raise wholesale term funding
Credit card receivables financed continued to significantly exceed our funding needs during the latter
through notes issued by a
half of 2007.
securitization special
purpose entity 2,759 2,250 2,500
Contractual obligations
In the normal course of business, we enter into contracts that give rise
Our long-term funding sources are managed to minimize cost by to commitments of future minimum payments that affect our liquidity.
limiting concentration by geographic location, investor segment, Depending on the nature of these commitments, the obligation may
instrument, currency and maturity profile. In addition, liquidity objec- be recorded on- or off-balance sheet. The table below provides a
tives, market conditions, interest rates, credit spreads and desired summary of our future contractual funding commitments.
Contractual obligations Table 57
2007
2006 2005
Over
(C$ millions) (1) Within 1 year 1 to 3 years 3 to 5 years Over 5 years Total Total Total
Unsecured long-term funding $ 16,892 $ 16,350 $ 13,628 $ 4,670 $ 51,540 $ 33,361 $ 24,004
Subordinated debentures – 118 – 6,117 6,235 7,103 8,167
Obligations under leases (2) 494 835 608 1,224 3,161 2,486 2,508
$ 17,386 $ 17,303 $ 14,236 $ 12,011 $ 60,936 $ 42,950 $ 34,679
(1) Amounts represent principal only and exclude accrued interest.
(2) Substantially all of our lease commitments are operating.
98 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Reputation risk
Reputation risk is the risk that an activity undertaken by an organiza- monitoring and reporting on reputation risk at an enterprise level
tion or its representatives will impair its image in the community or are: Ethics and Compliance Committee, Policy Review Committee,
lower public confidence in it, resulting in the loss of business, legal Structured Transactions Oversight Committee and the Group Risk
action or increased regulatory oversight. Committee.
Reputation risk can arise from a number of events and primar-
ily occurs in connection with regulatory, legal and operational risks. Risk control
Operational failures and non-compliance with laws and regulations Policies
can have a significant reputational impact on us. Policies and procedures support the management of reputation risk
In addition to the six risk management principles discussed across the organization. Business segments have specific policies in
earlier in the Risk management overview section, the following prin- place to manage the risks within their businesses, including reputa-
ciples also apply to our overall management of reputation risk: tion risk. A comprehensive set of policy requirements applies to the
• We must operate with integrity at all times in order to sustain a identification and assessment of reputation risk, including Know Your
strong and positive reputation Client due diligence controls and procedures, anti-money laundering
• Protecting our reputation is the responsibility of all our employ- and anti-terrorist financing policy requirements, auditor independence
ees, including senior management, and extends to all members of requirements, research standards, whistle blowing, and the require-
the Board of Directors. ments for managing conflicts of interest.
Code of Conduct Reporting
Our corporate values and Code of Conduct underpin the management The responsibility for monitoring and reporting on reputation risk
of risk to our reputation and drive our ethical culture. Our Code of issues is primarily within GRM. Regular comprehensive reporting is
Conduct is the foundation of employee and director awareness of provided to the Group Risk Committee and the Board of Directors and
the kinds of conduct that protect our reputation, and those that put its committees. This includes annual reporting on fraud issues, litiga-
our reputation at risk. tion issues and quarterly reporting on regulatory, compliance and
operational risk issues. Reputation risk issues are also raised in inter-
Responsibilities nal audit reports provided to senior management, summaries of which
The management of reputation risk is overseen by the Board of are provided to the Audit Committee.
Directors. The key senior management committees involved with
Regulatory and legal risk
Regulatory and legal risk is the risk of negative impact to business of compliance and regulatory risk management controls across the
activities, earnings or capital, regulatory relationships or reputation enterprise through the ECM framework, which includes policies for
as a result of failure to comply with or a failure to adapt to current and consistent and effective compliance, independent oversight of compli-
changing regulations, law, industry codes or rules, regulatory expecta- ance controls, timely reporting of trends and escalation of issues to
tions or ethical standards. senior management and the Board of Directors and timely execution of
Global Compliance, which is a part of Group Risk Management appropriate action plans.
( GRM ) has developed a comprehensive enterprise compliance man-
agement ( ECM ) framework that is consistent with regulatory guidance Risk measurement
from the OSFI and other regulators. The framework is designed to The identification and assessment of regulatory risk includes formal
promote the proactive, risk-based management of regulatory risk. risk assessment activities carried out across the organization, both
It applies to all of our businesses and operations, legal entities and at the individual business and operational level, and at the enterprise
employees globally and confirms the shared accountability of all level. Risk is measured through the assessment of the impact of
employees across the organization for ensuring we maintain robust regulatory and organizational changes, the introduction of new prod-
and effective regulatory risk and compliance controls. The framework ucts and services, and the acquisition or development of new lines
covers the following eight elements of compliance management: of business. It is also measured through the testing of the effective-
liaison with regulators, risk identification and assessment, control ness of the controls established to ensure compliance with regulatory
design and evaluation, learning and awareness, compliance execution, requirements and expectations. Although the use of metrics to
monitoring and oversight, issue management and reporting, and new measure compliance-related matters is relatively new and there are
initiative management. few proven methods for detecting leading indicators, we are working
to develop such metrics. Meanwhile, we use what measures are
Responsibilities available to identify issues and trends.
Global Compliance sets out the enterprise-wide requirements for the
identification, assessment, control, monitoring and reporting of regu- Risk control
latory and compliance risk (and associated operational and Policies
reputation risk), as well as remediation of any issues identified. We have a strong ethical and compliance culture grounded in our Code
Oversight is provided by the Board of Directors through the CR&RPC of Conduct. The Code of Conduct is regularly reviewed and updated
and the Audit Committee. The Ethics and Compliance Committee to ensure that it continues to meet the expectations of regulators and
supports our management of regulatory risk. It approves compliance other stakeholders. All our employees must reconfirm their under-
programs and compliance-related policies and informs and advises standing of and commitment to comply with the Code of Conduct at
the Group Risk Committee ( GRC), CR&RPC and the Audit Committee on least every two years, and employees in certain key roles, such as
significant regulatory issues and remedial measures. Group Executive and others in financial oversight roles as identified in
The Chief Compliance Officer ( CCO ) and Global Compliance work our Auditor Independence Policy, must do so annually.
closely with business partners to ensure the overall effectiveness
Royal Bank of Canada: Annual Report 2007 99
Management’s Discussion and Analysis
We provide online and face-to-face training for all our employees CR&RPC . In addition, the CCO provides an annual report on overall
in the area of anti-money laundering compliance and training in other compliance, and on specific topics, such as related party transactions,
compliance and regulatory risk related matters for relevant employees conflicts of interest, and compliance with Canadian consumer protec-
through other online tools and other job aids, as part of employees’ tion requirements, and the Global Chief Anti-Money Laundering Officer
regular job training, in new employee orientation materials, and peri- reports at least annually on anti-money laundering and anti-terrorist
odically through targeted face-to-face or webcast training. financing compliance. Similarly, senior compliance officers of our oper-
ating subsidiaries provide relevant annual and quarterly reports to
Reporting their respective senior management and Boards of Directors.
On a quarterly basis, the CCO reports compliance matters to senior
management, management committees, the Audit Committee and
Environmental risk
Environmental risk is the risk of loss to financial, operational or • Train employees to identify and manage environmental risks
reputation value resulting from the impact of environmental issues. • Maintain an open dialogue with stakeholders, both internal and
Environmental risk arises from our business activities and our opera- external to the organization
tions. For example, the environmental issues associated with our • Measure our performance and compare it to our objectives,
clients’ purchase and sale of contaminated property or development of which enables us to identify enhancement opportunities
large-scale projects may give rise to credit and reputation risk for us. • Periodically verify that our environmental risk management
Operational and legal risks may arise when we are faced with environ- policies and processes are operating as intended.
mental issues at our branches, offices or data processing centres.
We undertake independent and collaborative research to identify Policies
and better understand the material environmental risks we face. Our Environmental Blueprint, launched in October 2007, updates our
Some current and emerging issues include climate change, biodiver- corporate environmental policy. It details environmental issues that
sity, water and the rights of indigenous peoples, among others. are important to our stakeholders and us and outlines our commit-
ment to reducing our environmental footprint, responsible lending and
Responsibilities investment, and business growth and development of environmental
Environmental risk management activities are managed by the products and services.
Corporate Environmental Affairs Group ( CEA ) with support from Our suite of environmental credit risk management policies
our business segments and Corporate Support groups. The CEA is enables us to proactively identify and manage environmental risks in
responsible for developing and implementing the environmental risk our lending activities. These policies are regularly reviewed to ensure
management system, including identifying environmental risks in the compliance with legal and operational requirements, and to take into
organization, designing and supporting environmental risk policies, account evolving business activities.
programs and initiatives, monitoring implementation, and leading In addition to general policies for commercial and corporate
communication and training. The CEA also provides advisory services lending, we have sector-specific and business-segment-specific poli-
and support to business and functional units on the management of cies and guidelines. For example, we have a separate Policy on Social
specific environmental risks. and Environmental Review in our Project Finance business, which
reflects our commitment to the Equator Principles ( EPs). The EPs,
Risk measurement which were revised in 2007, are voluntary guidelines that help financial
Some environmental risks associated with our business and opera- institutions address the environmental and social risks associated
tional activities can be easily quantified while others are assessed on with project finance.
a qualitative basis. For example, in our lending activities, we quantify
the potential cost of cleaning up environmental contamination of Management and mitigation
properties used as security for loans, and the cost to an obligor of In addition to adherence to policies, standards, procedures and
making operational changes that may be required to meet environ- guidelines, environmental risk is mitigated through transaction
mental regulatory requirements or satisfy other obligations. In our structuring and the use of insurance as well as other mechanisms.
own operations, we quantify our cost to maintain compliance with The CEA supports lenders, risk managers and clients in the manage-
environmental regulations or applicable standards. Other environ- ment and mitigation of environmental risks in transactions, by
mental risks are assessed on a qualitative basis, for example, the recommending strategies to treat, eliminate or transfer (via insurance)
exposure of a particular industry to the effects of climate change and environmental risk.
climate change regulations. As environmental risk measurement meth-
odologies mature, particularly with respect to climate change, we will Reporting
incorporate more quantitative risk measures into our processes. The Board of Directors and senior management committees are
periodically provided with reports and analysis on risks associated
Risk control with environmental issues (for example, climate change and the
We manage environmental risk by maintaining an environmental Kyoto Accord, and the EPs), as appropriate. Loan losses resulting from
management system, including policy requirements, management and environmental issues are tracked and reported to senior management.
mitigation strategies, and reporting. Specifically, to manage environ- We report on our implementation of the EPs annually in our
mental risk, we: Corporate Responsibility Report and Public Accountability Statement
• Develop and maintain environmental policies, standards, ( CRR & PAS) and on rbc.com. The CRR & PAS also provides information
procedures and guidelines about our environmental policies, lending, emerging issues, stake-
• Monitor relevant laws and regulations, as well as other holder engagement, and environmental performance and initiatives.
requirements to which the bank adheres
• Maintain environmental programs and initiatives
• Establish roles and responsibilities for environmental
management in the organization
100 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Insurance risk
Insurance risk is the risk of loss that may occur when actuarial assump- appropriate segregation of duties, independent and periodic model
tions made in insurance product design and pricing activities differ reviews, and clear accountability and oversight.
from actual experience. Insurance risk arises from our life and health,
creditor, home and auto, and travel insurance, and reinsurance busi- Risk control
nesses. Insurance risk can be categorized into the following sub-risks: Policies
• Claims risk: The risk that the actual severity and/or frequency of Insurance risk policies articulate our strategies to identify, prioritize
claims differ from the levels assumed in pricing calculations. and manage insurance risk. GRM is responsible for insurance risk
This risk can occur through (i) a misestimation of expected claims policies which establish the expectations and parameters within which
activities as compared to actual claims activities, or (ii) the the insurance businesses may operate, communicate our risk tolerance,
mis-selection of a risk during the underwriting process and ensure accountability through clear roles and responsibilities.
• Policyholder behaviour risk: The risk that the behaviour of policy-
holders relating to premium payments, policy withdrawals or Authorities and limits
loans, policy lapses, surrenders and other voluntary terminations Risk approval authorities and limits are established by the Board of
differs from the behaviour assumed in pricing calculations Directors and delegated to management within the business units in
• Expense risk: The risk that the expense of acquiring or admin- order to guide insurance business activities. These delegated authori-
istering policies, or of processing claims, exceeds the costs ties and limits ensure our insurance portfolio is well diversified and
assumed in pricing calculations. within the risk appetite as approved by the Board of Directors.
Responsibilities Risk oversight and approval
Insurance risk approval authorities are established by the Board of GRM provides independent oversight over our insurance business
Directors upon recommendation of its committees and delegated to activities including product development, product pricing, under-
senior management. writing and claims management. GRM also approves authority for
The respective boards of directors of the insurance subsidiar- activities, which exceed business unit authorities and limits, and
ies are responsible for the stewardship of the insurance companies. certain business activities, which are deemed to be of significant risk.
These boards of directors oversee and monitor the management of the
insurance subsidiaries and ensure that the subsidiaries are properly Risk mitigation
managed and functioning within our overall strategies and policies. Our key elements for identifying, assessing and managing insurance
Group Risk Management (GRM) is responsible for providing risk risk include a risk-based approach for product development and
management direction and oversight to the insurance businesses pricing, effective guidelines and practices for underwriting and claims
and for providing comprehensive reporting of insurance risks facing management. In addition, transferring insurance risk to independent
the organization. The Appointed Actuaries of our Canadian insur- insurance companies or reinsurance is used to diversify our portfolio
ance subsidiaries are appointed by the boards of directors and have of insurance risks, limit loss exposure to large risks, and provide
statutory requirements to provide opinions on adequacy of liabilities, additional capacity for future growth.
sufficiency of capital, the insurance company’s future financial condi-
tion and fairness of treatment for policyholders. External actuarial Actuarial liabilities
reviewers, in accordance with the OSFI guidelines and Canadian Actuarial liabilities are estimates of the amounts required to meet obli-
Institute of Actuaries standards, provide oversight on the work of the gations resulting from insurance contracts. Liabilities for estimated
Appointed Actuaries. Our international insurance subsidiaries receive future policy benefits and expenses are established in accordance with
similar actuarial oversight. Global Functions and Global Technology the standards of practice of the Canadian Institute of Actuaries and the
and Operations (GTO) also provide direction and oversight to manage requirements of the OSFI and other relevant professional and regula-
risk within their areas of expertise. tory bodies. Actuarial liabilities under Canadian GAAP are calculated
Insurance business units are responsible for the active manage- using the Canadian Asset Liability Method. These estimates and actu-
ment of insurance risk in partnership with GRM, other Global Functions arial assumptions include explicit provisions for adverse deviations
groups and GTO. to ensure adequacy of liabilities and are validated through extensive
internal and independent external reviews and audits.
Risk measurement
We measure insurance risks at regular intervals to ensure that our risk Reporting
profile is appropriately monitored, reported, and aligned with business GRM regularly provides independent evaluation and reporting on our
assumptions. These risk measurements are used for Economic Capital insurance risk exposures to management at the business segment
quantification, valuation of actuarial liabilities, and to meet statutory level and at the enterprise level. The reports analyze and communicate
reporting requirements. This process is managed by GRM through the insurance risk information and contribute to the overall understanding
use of models. of insurance risk. Reporting includes an assessment of risks facing the
Models used for risk measurement are subject to a robust and insurance business units, trends related to all claims and adequacy of
systematic process of review and reporting in accordance with our actuarial liabilities. The reports also provide an assessment of the risk-
Model Risk Policy. Key elements of the policy include maintaining return profile of insurance products and a view of future potential risks.
appropriate model documentation, an approval process to ensure
Strategic risk
Strategic risk is the risk that an enterprise or a particular business area • All business strategies are supported by market and competitive
makes inappropriate strategic choices, or is unable to successfully analysis and financial projection of their expected impact.
implement selected strategies or related plans and decisions.
We apply the following principles to manage strategic risk: The effective identification and assessment of this risk is critical
• Significant decisions are aligned with our enterprise strategy for us and involves the Group Executive and the Board of Directors
• Business segment strategy is aligned with our enterprise strategy when identifying and assessing various strategic opportunities for
the organization.
Royal Bank of Canada: Annual Report 2007 101
Management’s Discussion and Analysis
Responsibilities Risk control
Responsibility for successfully implementing strategies is mandated to The project appropriation request ( PAR) process is used to manage
the individual heads of the businesses. The Strategy and Development strategic risk. Our strategic initiatives group provides an initial review
team within Global Functions is responsible for the articulation of our and co-ordinates circulating each PAR to GRM, Law and Corporate
enterprise strategy. This team also provides support for the develop- Treasury for review, comments and approval. The Board of Directors
ment of strategies of the business segments and lines of business. The and/or Group Risk Committee may approve the finalized version if
identification and analysis of strategic issues, opportunities and risks their approval is warranted. PARs are a critical part of our corporate
we face is an ongoing component of their overall responsibilities. governance framework and are available for review by regulators or
our external auditors as required.
Competitive risk
Competitive risk is the risk associated with the inability to build We manage competitive risk through appropriate identification
or maintain sustainable competitive advantage in a given market and assessment as part of our overall risk management process.
or markets. This risk can arise within or outside the financial This includes risk assessment of new or enhanced products and ser-
sector, from traditional or non-traditional competitors, domestically vices, alliances and acquisitions. Our ability to adapt to a changing
or globally. competitive environment will impact our overall financial performance.
Systemic risk
Systemic risk is the risk that the financial system as a whole may not Systemic risk is considered to be the least controllable risk we
withstand the effects of a crisis resulting from extraordinary economic, face. Our ability to mitigate this risk when undertaking business
political, social or financial circumstances. This could result in finan- activities is very limited, other than through collaborative mechanisms
cial, reputation or other losses. between industry participants, and, as appropriate, the public sector,
to reduce the frequency and impact of these risks.
Additional risks that may affect future results
By their very nature, forward-looking statements, including those by a large financial institution in Canada, the United States or interna-
made in this document, require us to make assumptions and are sub- tionally could adversely affect the financial markets generally and us
ject to inherent risks and uncertainties which may cause our actual specifically.
results to differ materially from our expectations expressed in such
forward-looking statements. Factors that might cause our actual finan- Currency rates
cial performance to vary from that described in our forward-looking Our revenue, expenses and income denominated in currencies other
statements include credit, market, operational, liquidity and funding than the Canadian dollar are subject to fluctuations in the movement
risks, and other risks discussed in detail in the Risk management of the Canadian dollar relative to those currencies. Such fluctuations
section. In addition, the following discussion sets forth other factors may affect our overall business and financial results. Our most signifi-
we believe could cause our actual results to differ materially from cant exposure is to the U.S. dollar due to our level of operations in the
expected results. U.S., and other activities conducted in U.S. dollars. The strengthening
of the Canadian dollar compared to the U.S. dollar over the last four
Industry factors years has had a significant effect on our results. We are also exposed
General business and economic conditions in Canada, the to the British pound and the Euro due to our activities conducted inter-
United States and other countries in which we conduct business nationally in these currencies. Further appreciation of the Canadian
Interest rates, foreign exchange rates, the stability of various financial dollar relative to the U.S. dollar, British pound and Euro reduced the
markets, including the impact from the continuing volatility in the translated value of U.S. dollar-, British pound- and Euro-denominated
U.S. subprime and related markets and lack of liquidity in various revenue, expenses and earnings.
other financial markets, consumer spending, business investment,
government spending, the level of activity and volatility of the capital Government monetary and other policies
markets, inflation and terrorism each impact the business and eco- Our businesses and earnings are affected by the monetary policies
nomic environments in which we operate and, ultimately, the level of that are adopted by the Bank of Canada and the Board of Governors
business activity we conduct and earnings we generate in a specific of the Federal Reserve System in the United States, as well as those
geographic region. For example, an economic downturn in a country adopted by international agencies, in jurisdictions in which we oper-
may result in high unemployment and lower family income, corporate ate. For example, monetary policy decisions by the Bank of Canada
earnings, business investment and consumer spending, and could have an impact on the level of interest rates, fluctuations of which can
adversely affect the demand for our loan and other products. In addi- have an impact on our earnings. As well, such policies can adversely
tion, our provision for credit losses would likely increase, resulting affect our clients and counterparties in Canada, the United States and
in lower earnings. Similarly, a downturn in a particular equity or debt internationally, which may increase the risk of default by such clients
market could cause a reduction in new issue and investor trading and counterparties. Our businesses and earnings are also affected by
activity or assets under management and assets under administration, fiscal or other policies that are adopted by various regulatory authori-
resulting in lower fee, commission and other revenue. Also, defaults ties in Canada, the United States and international agencies.
102 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Level of competition Changes in accounting standards, accounting policies and estimates
The competition for clients among financial services companies in the From time to time, the Accounting Standards Board of the CICA
consumer and business markets in which we operate is intense. Client changes the financial accounting and reporting standards that govern
loyalty and retention can be influenced by a number of factors, includ- the preparation of our financial statements. These changes can be dif-
ing relative service levels, the prices and attributes of our products or ficult to anticipate and can materially impact how we record and report
services, our reputation and actions taken by our competitors. Other our financial condition and results of operations. In some instances,
financial companies, such as insurance and mono-line companies and we may be required to retroactively apply a new or revised standard
non-financial companies are increasingly offering services traditionally that results in our restating prior period financial statements.
provided by banks. Such competition could also reduce fee revenue The accounting policies and methods we utilize determine
and adversely affect our earnings. how we report our financial condition and results of operations, and
they require management to make estimates or rely on assumptions
Changes in laws and regulations about matters that are inherently uncertain. Such estimates and
Laws and regulations are in place to protect the financial and other assumptions may require revisions, and changes to them may materi-
interests of our clients, investors and the public interest. Changes to ally adversely affect our results of operations and financial condition.
laws, including tax laws, regulations or regulatory policies, including Significant accounting policies are described in Note 1 to our
changes to our capital management framework, as well as changes in Consolidated Financial Statements.
how they are interpreted, implemented or enforced, could adversely As detailed in the Critical accounting policies and estimates
affect us, for example, by lowering barriers to entry in the businesses section, we have identified seven accounting policies as being
in which we operate or increasing our costs of compliance. In addition, “critical” to the presentation of our financial condition and results
our failure to comply with applicable laws, regulations or regulatory of operations as they; (i) require management to make particularly
policies could result in sanctions and financial penalties by regulatory subjective and/or complex judgments about matters that are inher-
agencies that could adversely impact our reputation and earnings. ently uncertain; and (ii) carry the likelihood that materially different
amounts could be reported under different conditions or using differ-
Judicial or regulatory judgments and legal proceedings ent assumptions and estimates.
Although we take what we believe to be reasonable measures
designed to ensure compliance with laws, regulations and regulatory Ability to attract employees and executives
policies in the jurisdictions in which we conduct business, there is no Competition for qualified employees and executives is intense
assurance that we always will be, or will be deemed to be, in compli- both within the financial services industry and from non-financial
ance. Accordingly, it is possible that we could receive a judicial or industries looking to recruit. If we are unable to retain and attract
regulatory judgment or decision that results in fines, damages and qualified employees and executives, our results of operations and
other costs that would damage our reputation and negatively impact financial condition, including our competitive position, may be
on our earnings. materially adversely affected.
We are also subject to litigation arising in the ordinary course
of our business. The adverse resolution of any litigation could Changes to our credit ratings
have a material adverse effect on our results or could give rise to There can be no assurance that our credit ratings and rating outlooks
significant reputational damage, which could impact our future from rating agencies such as Moody’s Investors Service, Standard &
business prospects. Poor’s, Fitch Ratings or DBRS will not be lowered or that these ratings
agencies will not issue adverse commentaries about us, potentially
Accuracy and completeness of information on clients resulting in higher financing costs and reduced access to capital mar-
and counterparties kets. A lowering of our credit ratings may also affect our ability, and the
When deciding to extend credit or enter into other transactions with cost, to enter into normal course derivative or hedging transactions.
clients and counterparties, we may rely on information provided by
or on behalf of clients and counterparties, including audited financial Development and integration of our distribution networks
statements and other financial information. We also may rely on rep- Although we regularly explore opportunities to expand our distribu-
resentations of clients and counterparties as to the completeness and tion networks, either through acquisitions or organically by adding,
accuracy of that information. Our financial results could be adversely for example, new bank branches, insurance offices, online savings
impacted if the financial statements and other financial information accounts and ATMs in high-growth markets in Canada, the United
relating to clients and counterparties on which we rely do not comply States and internationally, if we are not able to develop or integrate
with GAAP or are materially misleading. these distribution networks effectively, our results of operations and
financial condition may be negatively affected.
Bank specific factors
Execution of our strategy Other factors
Our ability to execute on our objectives and strategic goals will Other factors that may affect actual results include changes in gov-
influence our financial performance. If our strategic goals do not meet ernment trade policy, the timely and successful development of new
with success or there is a change in our strategic goals, our financial products and services, technological changes and our reliance on
results could be adversely affected. third parties to provide components of our business infrastructure,
fraud by internal or external parties, unexpected changes in consumer
Acquisitions and joint ventures spending and saving habits, the possible impact on our business from
Although we regularly explore opportunities for strategic acquisitions disease or illness that affects local, national or global economies,
of, or joint ventures with, companies in our lines of business, there is disruptions to public infrastructure, including transportation, com-
no assurance that we will receive required regulatory or shareholder munication, power and water, international conflicts and other political
approvals or be able to complete acquisitions or joint ventures on developments including those relating to the war on terrorism, and our
terms and conditions that satisfy our investment criteria. There is also success in anticipating and managing the associated risks.
no assurance we will achieve our financial or strategic objectives or
anticipated cost savings following acquisitions or forming joint ven-
tures. Our performance is contingent on retaining the clients and key
employees of acquired companies and joint ventures, and there is no
assurance that we will always succeed in doing so.
Royal Bank of Canada: Annual Report 2007 103
Management’s Discussion and Analysis
We caution that the foregoing discussion of risk factors is not other industry- and bank-specific factors that may adversely affect our
exhaustive and other factors could also adversely affect our results. future results and the market valuation placed on our common shares.
When relying on our forward-looking statements to make decisions Unless required by law, we do not undertake to update any forward-
with respect to us, investors and others should carefully consider looking statement, whether written or oral, that may be made from
the foregoing factors, other uncertainties and potential events, and time to time by us or on our behalf.
Additional financial information
Net interest income on average assets and liabilities from continuing operations (1) Table 58
Average balances (2) Interest (3) Average rate
(C$ millions, except percentage amounts) 2007 2006 2005 2007 2006 2005 2007 2006 2005
Assets
Deposits with other banks
Canada $ 1,570 $ 1,218 $ 915 $ 43 $ 41 $ 31 2.74% 3.37% 3.39%
United States 2,904 1,856 1,587 176 155 55 6.06 8.35 3.47
Other International 5,436 4,913 4,068 319 284 145 5.87 5.78 3.56
9,910 7,987 6,570 538 480 231 5.43 6.01 3.52
Securities
Trading 162,828 134,166 110,356 6,621 5,056 3,711 4.07 3.77 3.36
Available-for-sale (4) 31,516 – – 1,044 – – 3.31 – –
Investments (4) – 38,792 37,876 – 1,133 895 – 2.92 2.36
194,344 172,958 148,232 7,665 6,189 4,606 3.94 3.58 3.11
Asset purchased under reverse repurchase
agreements and securities borrowed 71,759 55,615 44,420 3,450 2,827 1,354 4.81 5.08 3.05
Loans (5)
Canada
Retail 152,588 135,852 124,001 9,376 8,157 7,037 6.14 6.00 5.67
Wholesale 31,541 31,539 28,087 1,047 1,264 1,262 3.32 4.01 4.49
184,129 167,391 152,088 10,423 9,421 8,299 5.66 5.63 5.46
United States 25,718 21,871 20,572 2,240 2,110 1,626 8.71 9.65 7.90
Other International 13,388 8,286 6,993 2,061 1,177 865 15.39 14.20 12.37
223,235 197,548 179,653 14,724 12,708 10,790 6.60 6.43 6.01
Total interest-earning assets 499,248 434,108 378,875 26,377 22,204 16,981 5.28 5.11 4.48
Non-interest-bearing deposits with other banks 2,137 2,806 2,567 – – – – – –
Customers’ liability under acceptances 10,270 8,748 6,411 – – – – – –
Other assets 69,345 56,438 57,447 – – – – – –
Total assets $ 581,000 $ 502,100 $ 445,300 $ 26,377 $ 22,204 $ 16,981 4.54% 4.42% 3.81%
Liabilities and shareholders’ equity
Deposits (6)
Canada $ 166,983 $ 167,015 $ 161,866 $ 5,669 $ 5,024 $ 3,724 3.39% 3.01% 2.30%
United States 53,817 47,913 40,004 2,563 2,018 1,047 4.76 4.21 2.62
Other International 121,924 91,334 70,168 5,538 3,666 2,175 4.54 4.01 3.10
342,724 306,262 272,038 13,770 10,708 6,946 4.02 3.50 2.55
Obligations related to securities sold short 46,654 38,630 34,169 1,997 2,071 1,381 4.28 5.36 4.04
Obligations related to assets sold under
repurchase agreements and securities loaned 42,503 32,786 25,912 2,364 1,882 1,120 5.56 5.74 4.32
Subordinated debentures 6,704 8,013 8,359 338 419 442 5.04 5.23 5.29
Other interest-bearing liabilities 3,569 2,759 4,041 376 328 299 10.54 11.89 7.40
Total interest-bearing liabilities 442,154 388,450 344,519 18,845 15,408 10,188 4.26 3.97 2.96
Non-interest-bearing deposits 25,752 17,037 16,159 – – – – – –
Acceptances 10,270 8,882 6,414 – – – – – –
Other liabilities 79,087 66,755 58,757 – – – – – –
Total liabilities $ 557,263 $ 481,124 $ 425,849 $ 18,845 $ 15,408 $ 10,188 3.38% 3.20% 2.39%
Shareholders’ equity
Preferred $ 1,553 $ 1,022 $ 811 $ – $ – $ – –% –% –%
Common 22,184 19,954 18,640 – – – – – –
Total liabilities and shareholders’ equity $ 581,000 $ 502,100 $ 445,300 $ 18,845 $ 15,408 $ 10,188 3.24% 3.07% 2.29%
Net interest income and margin $ 581,000 $ 502,100 $ 445,300 $ 7,532 $ 6,796 $ 6,793 1.30% 1.35% 1.53%
Net interest income and margin
(average earning assets) (7)
Canada $ 280,385 $ 257,319 $ 229,184 $ 6,435 $ 6,045 $ 5,628 2.30% 2.35% 2.46%
United States 106,044 90,684 74,842 412 108 608 .39 .12 .81
Other International 112,819 86,105 74,849 685 643 557 .61 .75 .74
Total $ 499,248 $ 434,108 $ 378,875 $ 7,532 $ 6,796 $ 6,793 1.51% 1.57% 1.79%
(1) Geographic classification for selected assets and liabilities is based on the domicile of the booking point of the subject assets and liabilities.
(2) Calculated using methods intended to approximate the average of the daily balances for the period.
(3) Interest income includes loan fees of $331 million (2006 – $348 million; 2005 – $343 million).
(4) Available-for-sale securities are carried at fair value. Prior to November 1, 2006, Available-for-sale securities were classified as investment securities and were carried at amortized cost.
(5) Average balances include impaired loans.
(6) Deposits include savings deposits with average balances of $46 billion (2006 – $46 billion; 2005 – $46 billion), interest expense of $.4 billion (2006 – $.4 billion; 2005 – $.3 billion) and
average rates of .9% (2006 – .8%; 2005 – .6%). Deposits also include term deposits with average balances of $240 billion (2006 – $206 billion; 2005 – $181 billion), interest expense of
$10.7 billion (2006 – $8.3 billion; 2005 – $5.3 billion) and average rates of 4.43% (2006 – 4.02%; 2005 – 2.95%).
(7) During the year, we reviewed the geographic information that was used to prepare the Net interest income and margin for the prior periods and determined that some information was
incorrectly classified; accordingly, the Net interest income and margins presented for the comparative periods have been revised.
104 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Loans and acceptances by geography (1) Table 59
As at October 31
(C$ millions) 2007 2006 2005 2004 2003
Canada
Residential mortgages $ 107,453 $ 94,272 $ 88,808 $ 80,168 $ 73,978
Personal 42,506 37,946 33,986 30,415 26,445
Credit cards 8,142 6,966 6,024 6,298 4,663
Small business (2) 2,652 2,318 1,951 1,928 1,335
Retail 160,753 141,502 130,769 118,809 106,421
Business (3) 51,237 44,353 42,383 35,214 34,551
Sovereign (4) 585 553 521 535 572
Bank 3,235 2,031 74 106 118
Wholesale 55,057 46,937 42,978 35,855 35,241
$ 215,810 $ 188,439 $ 173,747 $ 154,664 $ 141,662
United States
Retail 6,804 7,652 7,741 7,010 6,189
Wholesale 18,548 13,847 12,317 11,698 13,213
25,352 21,499 20,058 18,708 19,402
Other International
Retail 1,905 1,896 1,729 1,411 1,517
Wholesale 8,148 7,213 3,454 3,961 5,811
10,053 9,109 5,183 5,372 7,328
Total loans and acceptances $ 251,215 $ 219,047 $ 198,988 $ 178,744 $ 168,392
Total allowance for loan losses (1,493) (1,409) (1,498) (1,644) (2,055)
Total loans and acceptances, net of allowance for loan losses $ 249,722 $ 217,638 $ 197,490 $ 177,100 $ 166,337
(1) Geographic information is based on residence of borrower.
(2) Includes small business exposure managed on a pooled basis.
(3) Includes small business exposure managed on an individual client basis.
(4) Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Royal Bank of Canada: Annual Report 2007 105
Management’s Discussion and Analysis
Impaired loans by portfolio and geography (1) Table 60
As at October 31
(C$ millions, except percentage amounts) 2007 2006 2005 2004 2003
Residential mortgages $ 210 $ 165 $ 146 $ 156 $ 138
Personal 189 205 183 204 255
Small business (2) 19 13 11 8 17
Retail $ 418 $ 383 $ 340 $ 368 $ 410
Business (3)
Agriculture $ 65 $ 45 $ 48 $ 89 $ 146
Automotive 5 8 4 8 12
Consumer goods 83 85 73 59 75
Energy 3 6 47 162 240
Non-bank financial services 14 15 15 14 45
Forest products 29 12 16 163 181
Industrial products 29 17 12 60 44
Mining and metals 4 5 4 10 57
Real estate and related 345 82 74 102 113
Technology and media 10 49 52 89 129
Transportation and environment 19 19 14 19 143
Other 116 108 75 116 150
Sovereign (4) – – – – –
Bank – – – – –
Wholesale $ 722 $ 451 $ 434 $ 891 $ 1,335
Total impaired loans (5) , (6) $ 1,140 $ 834 $ 774 $ 1,259 $ 1,745
Canada
Residential mortgages $ 149 $ 127 $ 106 $ 96 $ 110
Personal 152 183 161 178 213
Small business (2) 19 13 11 8 17
Retail $ 320 $ 323 $ 278 $ 282 $ 340
Business (3) 377 266 225 501 724
Sovereign (4) – – – – –
Bank – – – – –
Wholesale $ 377 $ 266 $ 225 $ 501 $ 724
$ 697 $ 589 $ 503 $ 783 $ 1,064
United States
Retail $ 57 $ 15 $ 16 $ 44 $ 29
Wholesale 314 151 173 332 332
$ 371 $ 166 $ 189 $ 376 $ 361
Other International
Retail $ 41 $ 45 $ 46 $ 42 $ 41
Wholesale 31 34 36 58 279
$ 72 $ 79 $ 82 $ 100 $ 320
Total impaired loans $ 1,140 $ 834 $ 774 $ 1,259 $ 1,745
Specific allowance for loan losses (351) (263) (282) (487) (757)
Net impaired loans $ 789 $ 571 $ 492 $ 772 $ 988
Gross impaired loans as a % of loans and acceptances:
Residential mortgages .19% .17% .16% .19% .18%
Personal .39% .46% .45% .55% .79%
Small business (2) .72% .56% .56% .41% 1.27%
Retail .25% .25% .24% .29% .36%
Wholesale .88% .66% .74% 1.73% 2.46%
Total .45% .38% .39% .70% 1.04%
Specific allowance for loan losses as a % of gross impaired loans 30.79% 31.53% 36.43% 38.68% 43.38%
(1) Geographic information is based on residence of borrower.
(2) Includes small business exposure managed on a pooled basis.
(3) Includes small business exposure managed on an individual client basis.
(4) Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
(5) Includes foreclosed assets of $36 million in 2007 (2006 – $9 million; 2005 – $17 million; 2004 – $27 million; 2003 – $34 million).
(6) Past due loans greater than 90 days not included in impaired loans were $353 million in 2007 (2006 – $305 million; 2005 – $304 million; 2004 – $219 million; 2003 – $222 million).
106 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Provision for (recovery of) credit losses by portfolio and geography (1) Table 61
For the year ended October 31
(C$ millions, except percentage amounts) 2007 2006 2005 2004 2003
Residential mortgages $ 13 $ 6 $ 2 $ 7 $ 8
Personal 364 306 259 222 254
Credit cards 223 163 194 167 155
Small business (2) 34 29 27 27 39
Retail $ 634 $ 504 $ 482 $ 423 $ 456
Business (3)
Agriculture $ 2 $ (1) $ (12) $ 7 $ –
Automotive 2 4 – 2 –
Consumer goods 27 7 24 (11) 17
Energy (7) (53) (20) 50 78
Non-bank financial services – 4 10 – (1)
Forest products 10 2 (52) 7 16
Industrial products 10 4 (7) 13 5
Mining and metals 1 – (1) (3) 5
Real estate and related 70 1 (11) (1) (8)
Technology and media (2) (5) (6) 2 32
Transportation and environment 7 1 8 (32) 79
Other 28 14 (26) 64 42
Sovereign (4) – – – – –
Bank – – – – –
Wholesale $ 148 $ (22) $ (93) $ 98 $ 265
Total specific provision $ 782 $ 482 $ 389 $ 521 $ 721
Canada
Residential mortgages $ 5 $ 6 $ 1 $ 6 $ 4
Personal 334 296 247 211 230
Credit cards 220 161 192 166 152
Small business (2) 34 29 27 27 39
Retail $ 593 $ 492 $ 467 $ 410 $ 425
Business (3) 102 15 (32) 3 102
Sovereign (4) – – – – –
Bank – – – – –
Wholesale $ 102 $ 15 $ (32) $ 3 $ 102
$ 695 $ 507 $ 435 $ 413 $ 527
United States
Retail $ 34 $ 12 $ 15 $ 13 $ 30
Wholesale 50 (38) (60) 106 78
$ 84 $ (26) $ (45) $ 119 $ 108
Other International
Retail $ 7 $ – $ – $ – $ 1
Wholesale (4) 1 (1) (11) 85
$ 3 $ 1 $ (1) $ (11) $ 86
Total specific provision $ 782 $ 482 $ 389 $ 521 $ 721
Total general provision $ 9 $ (53) $ 66 $ (175) $ –
Total provision for credit losses $ 791 $ 429 $ 455 $ 346 $ 721
Specific provision as a % of average net loans and acceptances .33% .23% .21% .30% .43%
(1) Geographic information is based on residence of borrower.
(2) Includes small business exposure managed on a pooled basis.
(3) Includes small business exposure managed on an individual client basis.
(4) Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
Royal Bank of Canada: Annual Report 2007 107
Management’s Discussion and Analysis
Allowance for credit losses by portfolio and geography (1) Table 62
(C$ millions, except percentage amounts) 2007 2006 2005 2004 2003
Allowance at beginning of year $ 1,486 $ 1,568 $ 1,714 $ 2,164 $ 2,314
Provision for credit losses 791 429 455 346 721
Write-offs by portfolio
Residential mortgages (5) (5) (5) (7) (10)
Personal (444) (379) (353) (332) (379)
Credit cards (268) (204) (237) (207) (192)
Small business (2) (42) (36) (34) (44) (53)
Retail $ (759) $ (624) $ (629) $ (590) $ (634)
Business (3) $ (109) $ (89) $ (141) $ (411) $ (348)
Sovereign (4) – – – – –
Bank – – – – –
Wholesale $ (109) $ (89) $ (141) $ (411) $ (348)
Less developed countries exposures $ – $ – $ – $ – $ –
Total write-offs by portfolio $ (868) $ (713) $ (770) $ (1,001) $ (982)
Recoveries by portfolio
Residential mortgages $ 1 $ – $ – $ – $ –
Personal 74 64 69 68 68
Credit cards 46 41 43 39 37
Small business (2) 7 7 9 11 12
Retail $ 128 $ 112 $ 121 $ 118 $ 117
Business (3) $ 42 $ 93 $ 53 $ 98 $ 53
Sovereign (4) – – – – –
Bank – – – – –
Wholesale $ 42 $ 93 $ 53 $ 98 $ 53
Total recoveries by portfolio $ 170 $ 205 $ 174 $ 216 $ 170
Net write-offs $ (698) $ (508) $ (596) $ (785) $ (812)
Adjustments (5) (7) (3) (5) (11) (59)
Total allowance for credit losses at end of year $ 1,572 $ 1,486 $ 1,568 $ 1,714 $ 2,164
Canada
Residential mortgages $ 13 $ 11 $ 9 $ 11 $ 12
Personal 79 88 101 108 129
Small business (2) 9 9 8 6 13
Retail $ 101 $ 108 $ 118 $ 125 $ 154
Business (3) $ 153 $ 112 $ 112 $ 202 $ 284
Sovereign (4) – – – – –
Bank – – – – –
Wholesale $ 153 $ 112 $ 112 $ 202 $ 284
$ 254 $ 220 $ 230 $ 327 $ 438
United States
Retail $ 14 $ 3 $ 3 $ 5 $ 11
Wholesale 54 12 18 118 131
$ 68 $ 15 $ 21 $ 123 $ 142
Other International
Retail $ 13 $ 12 $ 12 $ 14 $ 15
Wholesale 16 16 19 23 162
$ 29 $ 28 $ 31 $ 37 $ 177
Total specific allowance for loan losses $ 351 $ 263 $ 282 $ 487 $ 757
General allowance $ 1,221 $ 1,223 $ 1,286 $ 1,227 $ 1,407
Total allowance for credit losses $ 1,572 $ 1,486 $ 1,568 $ 1,714 $ 2,164
Key ratios
Allowance for credit losses as a % of loans and acceptances .63% .68% .79% .97% 1.30%
Net write-offs as a % of average net loans and acceptances .30% .25% .32% .46% .49%
(1) Geographic information is based on residence of borrower.
(2) Includes small business exposure managed on a pooled basis.
(3) Includes small business exposure managed on an individual client basis.
(4) Sovereign refers to all central governments and agencies, central banks, as well as other qualifying public sector entities and multilateral development banks.
(5) Other adjustments include primarily foreign exchange translations on non-Canadian dollar denominated allowance for credit losses and acquisition adjustments for Flag Bank,
$21 million in 2007; Provident Financial Group Inc., $6 million in 2004; Admiralty Bancorp, Inc., $8 million in 2003.
108 Royal Bank of Canada: Annual Report 2007
Management’s Discussion and Analysis
Credit quality information by Canadian province (1) Table 63
(C$ millions) 2007 2006 2005 2004 2003
Loans and acceptances
Atlantic provinces (2) $ 11,556 $ 10,256 $ 10,255 $ 9,598 $ 9,191
Quebec 35,168 32,723 26,646 23,670 22,564
Ontario 92,956 83,839 78,283 70,896 64,351
Prairie provinces (3) 40,956 32,598 31,190 26,701 24,084
B.C. and territories (4) 35,174 29,023 27,373 23,799 21,472
Total loans and acceptances in Canada $ 215,810 $ 188,439 $ 173,747 $ 154,664 $ 141,662
Gross impaired loans
Atlantic provinces (2) $ 53 $ 53 $ 47 $ 60 $ 81
Quebec 118 68 44 131 155
Ontario 322 286 269 254 348
Prairie provinces (3) 112 107 78 93 140
B.C. and territories (4) 92 75 65 245 340
Total gross impaired loans in Canada $ 697 $ 589 $ 503 $ 783 $ 1,064
Specific provision
Atlantic provinces (2) $ 40 $ 33 $ 30 $ 34 $ 46
Quebec 66 47 7 (1) 77
Ontario 490 344 368 318 309
Prairie provinces (3) 51 38 44 31 55
B.C. and territories (4) 48 45 (14) 31 40
Total specific provision for credit losses in Canada $ 695 $ 507 $ 435 $ 413 $ 527
(1) Based on residence of borrower.
(2) Comprises Newfoundland and Labrador, Prince Edward Island, Nova Scotia and New Brunswick.
(3) Comprises Manitoba, Saskatchewan and Alberta.
(4) Comprises British Columbia, Nunavut, Northwest Territories and Yukon.
Small business loans and acceptances in Canada by sector (1) Table 64
As at October 31
(C$ millions) 2007 2006 2005 2004 2003
Agriculture $ 271 $ 248 $ 715 $ 519 $ 70
Automotive 650 601 490 463 462
Consumer goods 2,350 2,043 1,728 1,764 1,777
Energy 370 284 182 150 137
Non-bank financial services 88 73 78 51 97
Forest products 351 366 311 276 298
Industrial products 1,543 1,377 1,057 999 952
Mining and metals 98 88 57 62 65
Real estate and related 2,822 2,565 1,982 1,821 1,777
Technology and media 314 300 243 232 242
Transportation and environment 901 774 549 502 503
Other 4,488 4,098 3,365 3,298 3,325
Total small business loans $ 14,246 $ 12,817 $ 10,757 $ 10,137 $ 9,705
(1) Includes small business exposure managed on a pooled and individual client basis.
Royal Bank of Canada: Annual Report 2007 109
Management’s Discussion and Analysis
Consolidated
Financial Statements
Reports Notes to the Consolidated Financial Statements
111 Management’s responsibility for 117 Note 1 Significant accounting policies 148 Note 20 Pensions and other
financial reporting and estimates post-employment benefits
111 Report of Independent Registered 124 Note 2 Fair value of financial instruments 150 Note 21 Stock-based compensation
Chartered Accountants 127 Note 3 Securities 153 Note 22 Trading revenue
112 Management’s report on internal control 129 Note 4 Loans 153 Note 23 Business realignment charges
over financial reporting 130 Note 5 Securitizations 154 Note 24 Income taxes
112 Report of Independent Registered 132 Note 6 Variable interest entities (VIEs) 155 Note 25 Earnings per share
Chartered Accountants 133 Note 7 Derivative financial instruments 156 Note 26 Concentrations of credit risk
and hedging activities 156 Note 27 Guarantees, commitments
Consolidated Financial Statements 137 Note 8 Premises and equipment and contingencies
137 Note 9 RBC Dexia Investor Services 159 Note 28 Contractual repricing and
113 Consolidated Balance Sheets joint venture maturity schedule
114 Consolidated Statements of Income 138 Note 10 Goodwill and other intangibles 160 Note 29 Related party transactions
115 Consolidated Statements of 139 Note 11 Significant acquisitions and 161 Note 30 Results by business and
Comprehensive Income dispositions geographic segment
115 Consolidated Statements of Changes in 140 Note 12 Other assets 163 Note 31 Reconciliation of the application
Shareholders’ Equity 141 Note 13 Deposits of Canadian and United States generally
116 Consolidated Statements of Cash Flows 142 Note 14 Insurance accepted accounting principles
142 Note 15 Other liabilities 175 Note 32 Parent company information
143 Note 16 Subordinated debentures
144 Note 17 Trust capital securities
145 Note 18 Preferred share liabilities and
share capital
147 Note 19 Non-controlling interest in
subsidiaries
110 Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Management’s responsibility for financial reporting
The accompanying consolidated financial statements of Royal Bank This Committee reviews our consolidated financial statements and
of Canada ( RBC) were prepared by management, which is responsible recommends them to the Board for approval. Other key responsibilities
for the integrity and fairness of the information presented, including of the Audit Committee include reviewing our existing internal control
the many amounts that must of necessity be based on estimates and procedures and planned revisions to those procedures, and advising
judgments. These consolidated financial statements were prepared in the directors on auditing matters and financial reporting issues.
accordance with Canadian generally accepted accounting principles Our Compliance Officer and Chief Internal Auditor have full and
( GAAP ) pursuant to Subsection 308 of the Bank Act (Canada), which unrestricted access to the Audit Committee.
states that, except as otherwise specified by the Superintendent The Office of the Superintendent of Financial Institutions,
of Financial Institutions Canada, the financial statements are to be Canada ( OSFI ) examines and inquires into the business and affairs of
prepared in accordance with Canadian GAAP. Financial information RBC as deemed necessary to determine whether the provisions of the
appearing throughout our management’s discussion and analysis is Bank Act are being complied with, and that RBC is in sound financial
consistent with these consolidated financial statements. condition. In carrying out its mandate, OSFI strives to protect the rights
In discharging our responsibility for the integrity and fairness of and interests of depositors and creditors of RBC .
the consolidated financial statements and for the accounting systems Deloitte & Touche LLP, Independent Registered Chartered
from which they are derived, we maintain the necessary system of Accountants appointed by the shareholders of RBC upon the recom-
internal controls designed to ensure that transactions are authorized, mendation of the Audit Committee and Board, have performed an
assets are safeguarded and proper records are maintained. These independent audit of the consolidated financial statements and
controls include quality standards in hiring and training of employees, their report follows. The auditors have full and unrestricted access to
policies and procedures manuals, a corporate code of conduct and the Audit Committee to discuss their audit and related findings.
accountability for performance within appropriate and well-defined
areas of responsibility. Gordon M. Nixon
The system of internal controls is further supported by a President and Chief Executive Officer
compliance function, which is designed to ensure that we and our
employees comply with securities legislation and conflict of interest Janice R. Fukakusa
rules, and by an internal audit staff, which conducts periodic audits Chief Financial Officer
of all aspects of our operations.
The Board of Directors oversees management’s responsibilities
for financial reporting through an Audit Committee, which is composed Toronto, November 29, 2007
entirely of directors who are neither officers nor employees of RBC .
Report of Independent Registered Chartered Accountants
To the Shareholders of Royal Bank of Canada
We have audited the consolidated balance sheets of Royal Bank of In our opinion, these consolidated financial statements present
Canada (the “Bank”) as at October 31, 2007 and 2006 and the con- fairly, in all material respects, the financial position of the Bank
solidated statements of income, comprehensive income, changes as at October 31, 2007 and 2006 and the results of its operations and
in shareholders’ equity and cash flows for each of the three years in its cash flows for each of the three years in the period ended
the period ended October 31, 2007. These financial statements are October 31, 2007 in accordance with Canadian generally accepted
the responsibility of the Bank’s management. Our responsibility is to accounting principles.
express an opinion on these financial statements based on our audits. We have also audited, in accordance with the standards of the
With respect to the consolidated financial statements as at and Public Company Accounting Oversight Board (United States), the
for the years ended October 31, 2007 and 2006, we conducted our Bank’s internal control over financial reporting as of October 31,
audits in accordance with Canadian generally accepted auditing stan- 2007 based on criteria established in Internal Control – Integrated
dards and the standards of the Public Company Accounting Oversight Framework issued by the Committee of Sponsoring Organizations of
Board (United States). With respect to the consolidated financial state- the Treadway Commission and our report dated November 29, 2007
ments as at and for the year ended October 31, 2005, we conducted expressed an unqualified opinion on the Bank’s internal control over
our audit in accordance with Canadian generally accepted auditing financial reporting.
standards. These standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements Deloitte & Touche LLP
are free of material misstatement. An audit includes examining, on a Independent Registered Chartered Accountants
test basis, evidence supporting the amounts and disclosures in the Licensed Public Accountants
financial statements. An audit also includes assessing the accounting Toronto, Canada
principles used and significant estimates made by management, November 29, 2007
as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
Royal Bank of Canada: Annual Report 2007 111
Consolidated Financial Statements
Management’s report on internal control over financial reporting
Management of Royal Bank of Canada (RBC) is responsible for establish- Management assessed the effectiveness of RBC ’s internal control
ing and maintaining adequate internal control over financial reporting. over financial reporting as of October 31, 2007, based on the criteria
Internal control over financial reporting is a process designed by, or set forth in Internal Control – Integrated Framework issued by the
under the supervision of, the President and Chief Executive Officer and Committee of Sponsoring Organizations of the Treadway Commission.
the Chief Financial Officer and effected by the Board of Directors, man- Based on this assessment, management concluded that, as of
agement and other personnel to provide reasonable assurance regarding October 31, 2007, RBC ’s internal control over financial reporting is
the reliability of financial reporting and the preparation of financial effective. Also, management determined that there were no material
statements for external purposes in accordance with generally accepted weaknesses in RBC ’s internal control over financial reporting as of
accounting principles. It includes those policies and procedures that: October 31, 2007.
• pertain to the maintenance of records that accurately and fairly RBC ’s internal control over financial reporting as of October 31,
reflect, in reasonable detail, the transactions related to and 2007 has been audited by Deloitte & Touche LLP, Independent
dispositions of RBC ’s assets Registered Chartered Accountants, who also audited RBC ’s Consoli-
• provide reasonable assurance that transactions are recorded dated Financial Statements for the year ended October 31, 2007, as
as necessary to permit preparation of financial statements in stated in the Report of Independent Registered Chartered Accountants,
accordance with generally accepted accounting principles, and which report expressed an unqualified opinion on the effectiveness of
RBC receipts and expenditures are made only in accordance with RBC ’s internal control over financial reporting.
authorizations of management and RBC ’s directors
• provide reasonable assurance regarding prevention or timely detec- Gordon M. Nixon
tion of unauthorized acquisition, use, or disposition of RBC assets President and Chief Executive Officer
that could have a material effect on RBC ’s financial statements.
Janice R. Fukakusa
Due to its inherent limitations, internal control over financial reporting Chief Financial Officer
may not prevent or detect misstatements on a timely basis. Also, pro-
jections of any evaluation of the effectiveness of internal control over
financial reporting to future periods are subject to the risk that the Toronto, November 29, 2007
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
Report of Independent Registered Chartered Accountants
To the Shareholders of Royal Bank of Canada
We have audited the internal control over financial reporting of Royal necessary to permit preparation of financial statements in accordance
Bank of Canada (the “Bank”) as of October 31, 2007 based on criteria with generally accepted accounting principles and that receipts and
established in Internal Control – Integrated Framework issued by the expenditures of the company are being made only in accordance with
Committee of Sponsoring Organizations of the Treadway Commission. authorizations of management and directors of the company; and
The Bank’s management is responsible for maintaining effective (3) provide reasonable assurance regarding prevention or timely detec-
internal control over financial reporting and for its assessment of the tion of unauthorized acquisition, use or disposition of the company’s
effectiveness of internal control over financial reporting, included assets that could have a material effect on the financial statements.
in the accompanying Management’s Report on Internal Control over Because of the inherent limitations of internal control over financial
Financial Reporting. Our responsibility is to express an opinion on the reporting, including the possibility of collusion or improper manage-
Bank’s internal control over financial reporting based on our audit. ment override of controls, material misstatements due to error or fraud
We conducted our audit in accordance with the standards of the may not be prevented or detected on a timely basis. Also, projections
Public Company Accounting Oversight Board (United States). Those of any evaluation of the effectiveness of the internal control over finan-
standards require that we plan and perform the audit to obtain reason- cial reporting to future periods are subject to the risk that the controls
able assurance about whether effective internal control over financial may become inadequate because of changes in conditions, or that the
reporting was maintained in all material respects. Our audit included degree of compliance with the policies or procedures may deteriorate.
obtaining an understanding of internal control over financial reporting, In our opinion, the Bank maintained, in all material respects,
assessing the risk that a material weakness exists, testing and evalu- effective internal control over financial reporting as of October 31,
ating the design and operating effectiveness of internal control based 2007 based on the criteria established in Internal Control – Integrated
on the assessed risk, and performing such other procedures as we Framework issued by the Committee of Sponsoring Organizations of
considered necessary in the circumstances. We believe that our audit the Treadway Commission.
provides a reasonable basis for our opinion. We have also audited, in accordance with Canadian generally
A company’s internal control over financial reporting is a process accepted auditing standards and the standards of the Public Company
designed by, or under the supervision of, the company’s principal Accounting Oversight Board (United States), the consolidated financial
executive and principal financial officers, or persons performing similar statements as at and for the year ended October 31, 2007 of the Bank
functions, and effected by the company’s board of directors, manage- and our report dated November 29, 2007 expressed an unqualified
ment, and other personnel to provide reasonable assurance regarding opinion on those consolidated financial statements.
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted Deloitte & Touche LLP
accounting principles. A company’s internal control over financial Independent Registered Chartered Accountants
reporting includes those policies and procedures that (1) pertain to the Licensed Public Accountants
maintenance of records that, in reasonable detail, accurately and fairly Toronto, Canada
reflect the transactions and dispositions of the assets of the company; November 29, 2007
(2) provide reasonable assurance that transactions are recorded as
112 Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Consolidated Balance Sheets
As at October 31 (C$ millions) 2007 2006
Assets
Cash and due from banks $ 4,226 $ 4,401
Interest-bearing deposits with banks 11,881 10,502
Securities (Note 3)
Trading 148,246 147,237
Available-for-sale 30,009 –
Investments – 37,632
178,255 184,869
Assets purchased under reverse repurchase agreements and securities borrowed 64,313 59,378
Loans (Notes 4 and 5)
Retail 169,462 151,050
Wholesale 69,967 58,889
239,429 209,939
Allowance for loan losses (1,493) (1,409)
237,936 208,530
Other
Customers’ liability under acceptances 11,786 9,108
Derivatives (Note 7) 66,585 37,729
Premises and equipment, net (Note 8) 2,131 1,818
Goodwill (Note 10) 4,752 4,304
Other intangibles (Note 10) 628 642
Assets of operations held for sale – 82
Other assets (Note 12) 17,853 15,417
103,735 69,100
$ 600,346 $ 536,780
Liabilities and shareholders’ equity
Deposits (Note 13)
Personal $ 116,557 $ 114,040
Business and government 219,886 189,140
Bank 28,762 40,343
365,205 343,523
Other
Acceptances 11,786 9,108
Obligations related to securities sold short 44,689 38,252
Obligations related to assets sold under repurchase agreements and securities loaned 37,033 41,103
Derivatives (Note 7) 72,010 42,094
Insurance claims and policy benefit liabilities (Note 14) 7,283 7,337
Liabilities of operations held for sale – 32
Other liabilities (Note 15) 28,483 22,649
201,284 160,575
Subordinated debentures (Note 16) 6,235 7,103
Trust capital securities (Note 17) 1,400 1,383
Preferred share liabilities (Note 18) 300 298
Non-controlling interest in subsidiaries (Note 19) 1,483 1,775
Shareholders’ equity (Note 18)
Preferred shares 2,050 1,050
Common shares (shares issued – 1,276,260,033 and 1,280,889,745) 7,300 7,196
Contributed surplus 235 292
Treasury shares – preferred (shares held – 248,800 and 93,700) (6) (2)
– common (shares held – 2,444,320 and 5,486,072) (101) (180)
Retained earnings 18,167 15,771
Accumulated other comprehensive income (loss) (3,206) (2,004)
24,439 22,123
$ 600,346 $ 536,780
Gordon M. Nixon Robert B. Peterson
President and Chief Executive Officer Director
Royal Bank of Canada: Annual Report 2007 113
Consolidated Financial Statements
Consolidated Statements of Income
For the year ended October 31 (C$ millions) 2007 2006 2005
Interest income
Loans $ 14,724 $ 12,708 $ 10,790
Securities 7,665 6,189 4,606
Assets purchased under reverse repurchase agreements and securities borrowed 3,450 2,827 1,354
Deposits with banks 538 480 231
26,377 22,204 16,981
Interest expense
Deposits 13,770 10,708 6,946
Other liabilities 4,737 4,281 2,800
Subordinated debentures 338 419 442
18,845 15,408 10,188
Net interest income 7,532 6,796 6,793
Non-interest income
Insurance premiums, investment and fee income 3,152 3,348 3,270
Trading revenue 2,261 2,574 1,594
Investment management and custodial fees 1,579 1,301 1,232
Mutual fund revenue 1,473 1,242 962
Securities brokerage commissions 1,353 1,243 1,163
Service charges 1,303 1,216 1,153
Underwriting and other advisory fees 1,217 1,024 1,026
Foreign exchange revenue, other than trading 533 438 407
Card service revenue 491 496 579
Credit fees 293 241 187
Securitization revenue (Note 5) 261 257 285
Net gain on sale of available-for-sale securities (Note 3) 63 – –
Net gain on sale of investment securities – 88 85
Other 951 373 448
Non-interest income 14,930 13,841 12,391
Total revenue 22,462 20,637 19,184
Provision for credit losses (Note 4) 791 429 455
Insurance policyholder benefits, claims and acquisition expense 2,173 2,509 2,625
Non-interest expense
Human resources (Notes 20 and 21) 7,860 7,268 6,682
Equipment 1,009 957 960
Occupancy 839 792 749
Communications 723 687 632
Professional fees 530 546 500
Outsourced item processing 308 298 296
Amortization of other intangibles (Note 10) 96 76 50
Other 1,108 871 1,488
12,473 11,495 11,357
Business realignment charges (Note 23) – – 45
Income from continuing operations before income taxes 7,025 6,204 4,702
Income taxes (Note 24) 1,392 1,403 1,278
Net income before non-controlling interest 5,633 4,801 3,424
Non-controlling interest in net income of subsidiaries 141 44 (13)
Net income from continuing operations 5,492 4,757 3,437
Net loss from discontinued operations – (29) (50)
Net income $ 5,492 $ 4,728 $ 3,387
Preferred dividends (Note 18) (88) (60) (42)
Net gain on redemption of preferred shares – – 4
Net income available to common shareholders $ 5,404 $ 4,668 $ 3,349
Average number of common shares (in thousands) (Note 25) 1,273,185 1,279,956 1,283,433
Basic earnings per share (in dollars) $ 4.24 $ 3.65 $ 2.61
Basic earnings per share from continuing operations (in dollars) $ 4.24 $ 3.67 $ 2.65
Basic earnings (loss) per share from discontinued operations (in dollars) $ – $ (.02) $ (.04)
Average number of diluted common shares (in thousands) (Note 25) 1,289,314 1,299,785 1,304,680
Diluted earnings per share (in dollars) $ 4.19 $ 3.59 $ 2.57
Diluted earnings per share from continuing operations (in dollars) $ 4.19 $ 3.61 $ 2.61
Diluted earnings (loss) per share from discontinued operations (in dollars) $ – $ (.02) $ (.04)
Dividends per share (in dollars) $ 1.82 $ 1.44 $ 1.18
114 Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Consolidated Statements of Comprehensive Income
For the year ended October 31 (C$ millions) 2007 2006 2005
Net income $ 5,492 $ 4,728 $ 3,387
Other comprehensive income, net of taxes
Net unrealized gains (losses) on available-for-sale securities (93) – –
Reclassification of (gains) losses on available-for-sale securities to income 28 – –
(65) – –
Unrealized foreign currency translation gains (losses) (2,965) (501) (624)
Reclassification of (gains) losses on foreign currency translation to income (42) 2 5
Net foreign currency translation gains (losses) from hedging activities 1,804 269 401
(1,203) (230) (218)
Net gains (losses) on derivatives designated as cash flow hedges 80 – –
Reclassification to income of (gains) losses on derivatives designated as cash flow hedges 31 – –
111 – –
Other comprehensive income (loss) (1,157) (230) (218)
Total comprehensive income $ 4,335 $ 4,498 $ 3,169
Consolidated Statements of Changes in Shareholders’ Equity
For the year ended October 31 (C$ millions) 2007 2006 2005
Preferred shares (Note 18)
Balance at beginning of year $ 1,050 $ 700 $ 532
Issued 1,150 600 300
Redeemed for cancellation (150) (250) (132)
Balance at end of year 2,050 1,050 700
Common shares (Note 18)
Balance at beginning of year 7,196 7,170 6,988
Issued 170 127 214
Purchased for cancellation (66) (101) (32)
Balance at end of year 7,300 7,196 7,170
Contributed surplus
Balance at beginning of year 292 265 169
Renounced stock appreciation rights (6) (2) (6)
Stock-based compensation awards (46) (18) 26
Gain on redemption of preferred shares – – 7
Initial adoption of AcG-15, Consolidation of Variable Interest Entities – – 54
Other (5) 47 15
Balance at end of year 235 292 265
Treasury shares – preferred (Note 18)
Balance at beginning of year (2) (2) –
Sales 33 51 –
Purchases (37) (51) (2)
Balance at end of year (6) (2) (2)
Treasury shares – common (Note 18)
Balance at beginning of year (180) (216) (294)
Sales 175 193 179
Purchases (96) (157) (47)
Initial adoption of AcG-15, Consolidation of Variable Interest Entities – – (54)
Balance at end of year (101) (180) (216)
Retained earnings
Balance at beginning of year 15,771 13,704 12,065
Transition adjustment – Financial instruments (1) (86) – –
Net income 5,492 4,728 3,387
Preferred share dividends (Note 18) (88) (60) (42)
Common share dividends (Note 18) (2,321) (1,847) (1,512)
Premium paid on common shares purchased for cancellation (580) (743) (194)
Issuance costs and other (21) (11) –
Balance at end of year 18,167 15,771 13,704
Accumulated other comprehensive income (loss)
Transition adjustment – Financial instruments (1) (45) – –
Unrealized gains and losses on available-for-sale securities (65) – –
Unrealized foreign currency translation gains and losses, net of hedging activities (3,207) (2004) (1,774)
Gains and losses on derivatives designated as cash flow hedges 111 – –
Balance at end of year (3,206) (2,004) (1,774)
Retained earnings and Accumulated other comprehensive income 14,961 13,767 11,930
Shareholders’ equity at end of year $ 24,439 $ 22,123 $ 19,847
(1) The transition adjustment relates to the implementation of the new financial instruments accounting standards. Refer to Note 1.
Royal Bank of Canada: Annual Report 2007 115
Consolidated Financial Statements
Consolidated Statements of Cash Flows
For the year ended October 31 (C$ millions) 2007 2006 2005
Cash flows from operating activities
Net income from continuing operations $ 5,492 $ 4,757 $ 3,437
Adjustments to determine net cash from (used in) operating activities
Provision for credit losses 791 429 455
Depreciation 434 405 414
Business realignment payments (38) (74) (94)
Future income taxes (147) 144 (482)
Amortization of other intangibles 96 76 50
(Gain) loss on sale of premises and equipment (16) (16) (21)
(Gain) loss on loan securitizations (41) (16) (101)
(Gain) loss on sale of available-for-sale securities (63) – –
(Gain) loss on sale of investment securities – (88) (85)
Changes in operating assets and liabilities
Insurance claims and policy benefit liabilities (54) 220 629
Net change in accrued interest receivable and payable (28) 217 (5)
Current income taxes 1,034 (203) (9)
Derivative assets (28,856) 1,105 63
Derivative liabilities 29,916 (498) 391
Trading securities 9,623 (21,477) (36,438)
Net change in brokers and dealers receivable and payable (317) (1,017) 1,334
Other 1,647 1,036 840
Net cash from (used in) operating activities from continuing operations 19,473 (15,000) (29,622)
Net cash from (used in) operating activities from discontinued operations – 4 95
Net cash from (used in) operating activities 19,473 (14,996) (29,527)
Cash flows from investing activities
Change in interest-bearing deposits with banks (1,379) (5,265) 1,030
Change in loans, net of loan securitizations (39,569) (33,534) (27,670)
Proceeds from loan securitizations 8,020 8,139 5,607
Proceeds from sale of available-for-sale securities 7,565 – –
Proceeds from sale of investment securities – 14,709 25,628
Proceeds from maturity of available-for-sale securities 18,784 – –
Proceeds from maturity of investment securities – 28,222 18,431
Purchases of available-for-sale securities (24,097) – –
Purchases of investment securities – (38,474) (36,373)
Net acquisitions of premises and equipment (706) (511) (383)
Change in assets purchased under reverse repurchase agreements and securities borrowed (4,935) (16,405) 3,976
Net cash from (used in) acquisitions (373) (256) –
Net cash from (used in) investing activities from continuing operations (36,690) (43,375) (9,754)
Net cash from (used in) investing activities from discontinued operations – 140 2,027
Net cash from (used in) investing activities (36,690) (43,235) (7,727)
Cash flows from financing activities
Change in deposits 17,831 36,663 35,001
Issue of RBC Trust Capital Securities – – 1,200
Issue of subordinated debentures 87 – 800
Repayment of subordinated debentures (989) (953) (786)
Issue of preferred shares 1,150 600 300
Redemption of preferred shares for cancellation (150) (250) (132)
Issuance costs (23) (6) (3)
Issue of common shares 155 116 198
Purchase of common shares for cancellation (646) (844) (226)
Sales of treasury shares 208 244 179
Purchase of treasury shares (133) (208) (49)
Dividends paid (2,278) (1,807) (1,469)
Dividends/distributions paid by subsidiaries to non-controlling interests (59) (47) (13)
Change in obligations related to assets sold under repurchase agreements and securities loaned (4,070) 17,722 (3,092)
Change in obligations related to securities sold short 6,436 5,861 7,386
Change in short-term borrowings of subsidiaries (145) 620 (628)
Net cash from (used in) financing activities from continuing operations 17,374 57,711 38,666
Net cash from (used in) financing activities 17,374 57,711 38,666
Effect of exchange rate changes on cash and due from banks (332) (80) (122)
Net change in cash and due from banks (175) (600) 1,290
Cash and due from banks at beginning of year 4,401 5,001 3,711
Cash and due from banks at end of year $ 4,226 $ 4,401 $ 5,001
Supplemental disclosure of cash flow information
Amount of interest paid in year $ 18,494 $ 14,678 $ 10,109
Amount of income taxes paid in year $ 1,352 $ 1,682 $ 1,987
116 Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Consolidated Financial Statements (all tabular amounts are in millions of Canadian dollars, except per share amounts)
Note 1 Significant accounting policies and estimates
The accompanying Consolidated Financial Statements have been loans and receivables, or other financial liabilities. Transaction costs
prepared in accordance with Subsection 308 of the Bank Act (Canada) are expensed as incurred for financial instruments classified or desig-
(the Act), which states that, except as otherwise specified by the nated as held-for-trading. For other financial instruments, transaction
Office of the Superintendent of Financial Institutions Canada ( OSFI ), costs are capitalized on initial recognition.
our Consolidated Financial Statements are to be prepared in accor- Financial assets and financial liabilities held-for-trading are
dance with Canadian generally accepted accounting principles ( GAAP ). measured at fair value with changes in those fair values recognized
The significant accounting policies used in the preparation of these in Non-interest income. Financial assets held-to-maturity, loans and
financial statements, including the accounting requirements of the receivables, and other financial liabilities are measured at amortized
OSFI, are summarized below. These accounting policies conform, in all cost using the effective interest method. Available-for-sale financial
material respects, to Canadian GAAP. assets, which include loan substitute securities, are measured at fair
value with unrealized gains and losses, including changes in foreign
Basis of consolidation exchange rates, being recognized in OCI. Investments in equity instru-
Our Consolidated Financial Statements include the assets and liabilities ments classified as available-for-sale that do not have a quoted market
and results of operations of all subsidiaries and variable interest price in an active market are measured at cost.
entities (VIE s) where we are the Primary Beneficiary after elimination Derivative instruments are recorded on our Consolidated Balance
of intercompany transactions and balances. The equity method is used Sheets at fair value, including those derivatives that are embedded in
to account for investments in associated corporations and limited financial or non-financial contracts that are not closely related to the
partnerships in which we have significant influence. These invest- host contracts. Changes in the fair values of derivative instruments are
ments are reported in Other assets. Our share of earnings, gains and recognized in Net income except for derivatives designated as effec-
losses realized on dispositions and writedowns to reflect other-than- tive cash flow hedges or hedges of foreign currency exposure of a net
temporary impairment in the value of these investments are included investment in a self-sustaining foreign operation, the changes in fair
in Non-interest income. The proportionate consolidation method is value of which are recognized in OCI.
used to account for investments in joint ventures in which we exercise Section 3855 also provides an entity the option to designate
joint control, whereby our pro rata share of assets, liabilities, income a financial instrument as held-for-trading (the fair value option) on
and expenses is consolidated. its initial recognition or upon adoption of the standard, even if the
financial instrument was not acquired or incurred principally for the
Significant accounting changes purpose of selling or repurchasing it in the near term. An instrument
Financial Instruments that is classified as held-for-trading by way of this fair value option
On November 1, 2006, we adopted three new financial instruments must have a reliable fair value and satisfy one of the following criteria
accounting standards that were issued by the Canadian Institute of established by the OSFI : (i) when doing so eliminates or significantly
Chartered Accountants ( CICA ): Handbook Section 1530, Compre­ reduces a measurement or recognition inconsistency that would other-
hensive Income (Section 1530), Handbook Section 3855, Financial wise arise from measuring assets or liabilities, or recognizing gains
Instruments – Recognition and Measurement (Section 3855), and and losses on them on a different basis; (ii) it belongs to a group of
Handbook Section 3865, Hedges (Section 3865). Comparative financial assets or financial liabilities or both that are managed and
amounts for prior periods have not been restated. evaluated on a fair value basis in accordance with our risk manage-
ment or investment strategy, and are reported to senior management,
Comprehensive Income on that basis; or (iii) it is an embedded derivative in a financial or non-
Section 1530 introduces Comprehensive Income, which consists of financial host contract and the derivative is not closely related to the
Net income and Other comprehensive income ( OCI ). OCI represents host contract.
changes in Shareholders’ equity during a period arising from trans- The principal categories of our financial assets that we
actions and other events with non-owner sources and includes designated as held-for-trading using the fair value option include
unrealized gains and losses on financial assets classified as available- (i) investments supporting the policy benefit liabilities on life and
for-sale, unrealized foreign currency translation gains or losses arising health insurance contracts issued by our insurance operations;
from self-sustaining foreign operations, net of hedging activities, (ii) investments used to offset exposures under derivative contracts
and changes in the fair value of the effective portion of cash flow in relation to our sales and trading activities; (iii) certain loans to cus-
hedging instruments. We have included in our Consolidated Financial tomers whose related hedging derivatives are measured at fair value;
Statements a Consolidated Statement of Comprehensive Income for and (iv) assets purchased under reverse repurchase agreements that
the changes in these items, net of taxes, since November 1, 2006, form part of our trading portfolio which is managed and evaluated on
while the cumulative changes in OCI are included in Accumulated other a fair value basis. Financial liabilities designated as held-for-trading
comprehensive income (loss) ( AOCI ), which is presented as a new cat- include (i) deposits and structured notes with embedded derivatives
egory of Shareholders’ equity on our Consolidated Balance Sheets. that are not closely related to the host contracts; (ii) assets sold under
repurchase agreements that form part of our trading portfolio which is
Financial Instruments – Recognition and Measurement managed and evaluated on a fair value basis; and (iii) certain deposits
Section 3855 establishes standards for recognizing and measuring to offset the impact of related hedging derivatives measured at fair
financial assets, financial liabilities and non-financial derivatives. It value. Fair value designation for these financial assets and financial
requires that financial assets and financial liabilities, including deriva- liabilities significantly reduces the measurement inconsistencies.
tives, be recognized on our Consolidated Balance Sheets when we Other significant accounting implications arising upon the adop-
become a party to the contractual provisions of a financial instrument tion of Section 3855 include the use of the effective interest method
or non-financial derivative contract. Under this standard, all financial for any transaction costs or fees, premiums or discounts earned on
instruments are required to be measured at fair value on initial recog- financial instruments measured at amortized cost, and the recogni-
nition except for certain related party transactions. Measurement in tion of the inception fair value of the obligation undertaken in issuing
subsequent periods depends on whether the financial instrument has a guarantee that meets the definition of a guarantee pursuant to
been classified as held-for-trading, available-for-sale, held-to-maturity, CICA Accounting Guideline 14, Disclosure of Guarantees (AcG-14).
Royal Bank of Canada: Annual Report 2007 117
Consolidated Financial Statements
Note 1 Significant accounting policies and estimates (continued)
Subsequent remeasurement at fair value is not required unless the Convertible and Other Debt Instruments with Embedded Derivatives
financial guarantee also meets the definition of a derivative. These On August 1, 2007, we adopted CICA Emerging Issues Committee
guarantees are remeasured at fair value at each balance sheet date Abstract No. 164, Convertible and Other Debt Instruments with
and reported as a derivative in Other assets or Other liabilities, Embedded Derivatives (EIC-164). EIC-164 provides clarification regard-
as appropriate. ing the accounting treatment for certain types of convertible debt
instruments, their classification as liabilities or equity, and the implica-
Hedges tions on earnings per share. It also provides guidance on whether these
Section 3865 specifies the criteria that must be satisfied in order for instruments contain any embedded derivatives that are required to be
hedge accounting to be applied and the accounting for each of the accounted for separately. The adoption of EIC-164 was not material to
permitted hedging strategies. We use derivatives and non-derivative our consolidated financial position or results of operations.
financial instruments in our hedging strategies to manage our
exposures to interest, currency, credit and other market risks. When Accounting Policy Choice for Transaction Costs
derivatives are used to manage our own exposures, we determine On June 1, 2007, CICA Emerging Issues Committee issued Abstract
for each derivative whether hedge accounting can be applied. Where No. 166, Accounting Policy Choice for Transaction Costs (EIC-166).
hedge accounting can be applied, a hedging relationship is designated This EIC addresses the accounting policy choice of expensing or add-
as a fair value hedge, a cash flow hedge or a hedge of foreign currency ing transaction costs related to the acquisition of financial assets and
exposure of a net investment in a self-sustaining foreign operation. financial liabilities that are classified as other than held-for-trading.
For our detailed accounting policy on hedge accounting refer to the Specifically, it requires the same accounting policy choice be applied
Derivatives section below in Note 1. to all similar financial instruments classified as other than held-for-
trading, but permits a different policy choice for financial instruments
Impact upon adoption of Sections 1530, 3855 and 3865 that are not similar. EIC-166 became effective for us on September 30,
The transition adjustments attributable to the remeasurement of 2007 and requires retroactive application to all transaction costs
financial assets and financial liabilities at fair value, other than financial accounted for in accordance with Section 3855. Our current recogni-
assets classified as available-for-sale and hedging instruments desig- tion policy for transaction costs, which was adopted on November 1,
nated as cash flow hedges or hedges of foreign currency exposure of 2006, is consistent with this guidance.
net investment in self-sustaining foreign operations, were recognized
in opening Retained earnings as at November 1, 2006. Adjustments The accounting policies described below have been updated to reflect
arising from remeasuring financial assets classified as available-for- the requirements under the new financial instruments accounting
sale at fair value were recognized in opening AOCI as at that date. standards, and where applicable, include a discussion on the policies
For hedging relationships existing prior to adopting Section 3865 used in the prior periods for comparative purposes.
that continue to qualify for hedge accounting under the new standard,
the transition accounting is as follows: (i) Fair value hedges – any gain Translation of foreign currencies
or loss on the hedging instrument was recognized in opening Retained Monetary assets and liabilities denominated in foreign currencies
earnings and the carrying amount of the hedged item was adjusted are translated into Canadian dollars at rates prevailing at the balance
by the cumulative change in fair value attributable to the designated sheet date. Non-monetary assets and liabilities are translated into
hedged risk and was also included in opening Retained earnings; Canadian dollars at historical rates. Income and expenses denomi-
(ii) Cash flow hedges and hedges of net investments in self-sustaining nated in foreign currencies are translated at average rates of exchange
foreign operations – the effective portion of any gain or loss on the for the year.
hedging instrument was recognized in AOCI and the cumulative inef- Assets and liabilities of our self-sustaining operations with func-
fective portion was included in opening Retained earnings. tional currencies other than the Canadian dollar are translated into
We recorded the following transition adjustments in our Canadian dollars at rates prevailing at the balance sheet date, and
Consolidated Financial Statements: (i) a reduction of $86 million, income and expenses of these foreign operations are translated at
net of taxes, to our opening Retained earnings, representing changes average rates of exchange for the year.
made to the value of certain financial instruments and the ineffective Unrealized gains or losses arising as a result of the translation of
portion of qualifying hedges, in compliance with the measurement our foreign self-sustaining operations along with the effective portion
basis under the new standards including those related to the use of of related hedges are reported as a component of OCI on an after-tax
fair value option; and (ii) recognition in AOCI of $45 million, net of basis. Prior to November 1, 2006, these amounts were included in
taxes, related to the net losses for available-for-sale financial assets Shareholders’ equity. Upon disposal or dilution of our interest in such
and cumulative losses on the effective portion of our cash flow hedges investments, an appropriate portion of the accumulated net transla-
that are now required to be recognized under Sections 3855 and 3865. tion gains or losses is included in Non-interest income.
In addition, we have reclassified to AOCI $2,004 million of net unreal- Other foreign currency translation gains and losses are included
ized foreign currency losses on net investments in self-sustaining in Non-interest income.
foreign operations that were previously presented as a separate item
in Shareholders’ equity. Securities
Securities are classified, based on management’s intentions, as
Variable Interest Entities held-for-trading, available-for-sale or held-to-maturity.
On February 1, 2007, we adopted CICA Emerging Issues Committee Held-for-trading securities include securities purchased for sale
Abstract No. 163, Determining the Variability to be Considered in in the near term and securities designated as held-for-trading under
Applying AcG­15 (EIC-163). EIC-163 provides additional clarification the fair value option are reported at fair value. Obligations to deliver
on how to analyze and consolidate VIE s. The implementation of Trading securities sold but not yet purchased are recorded as liabilities
EIC-163 resulted in the deconsolidation of certain investment funds; and carried at fair value. Realized and unrealized gains and losses
however, the impact was not material to our consolidated financial on these securities are recorded as Trading revenue in Non-interest
position or results of operations. income. Dividend and interest income accruing on Trading securities is
recorded in Interest income. Interest and dividends accrued on interest-
bearing and equity securities sold short are recorded in Interest expense.
118 Royal Bank of Canada: Annual Report 2007
Consolidated Financial Statements
Available-for-sale securities include (i) securities which may be Loans
sold in response to or in anticipation of changes in interest rates and Loans are recorded at amortized cost unless they have been desig-
resulting prepayment risk, changes in foreign currency risk, changes in nated as held-for-trading using the fair value option. Loans recorded
funding sources or terms, or to meet liquidity needs; and (ii) loan sub- at amortized cost are net of an Allowance for loan losses and unearned
stitute securities which are client financings that have been structured income which comprises unearned interest and unamortized loan fees.
as after-tax investments rather than conventional loans in order to Loans designated as held-for-trading are carried at fair value. Prior to
provide the clients with a borrowing rate advantage. Available-for-sale November 1, 2006, all loans were presented at amortized cost net of
securities are measured at fair value with unrealized gains and losses, an Allowance for loan losses and unearned income.
including changes in foreign exchange rates, recognized in OCI net of Loans stated at amortized cost are subject to periodic impairment
tax. Purchase premiums or discounts on available-for-sale securities review and are classified as impaired when, in management’s opinion,
are amortized over the life of the security using the effective interest there is no longer reasonable assurance of the timely collection of the
method and are recognized in Net interest income. Investments in full amount of principal or interest. Whenever a payment is 90 days
equity instruments classified as Available-for-sale that do not have a past due, loans other than credit card balances and loans guaranteed
quoted market price in an active market are measured at cost. or insured by a Canadian government (federal or provincial) or a
Held-to-maturity securities are debt securities where we have Canadian government agency (collectively “Canadian government”)
the intention and ability to hold the investment until its maturity date. are classified as impaired unless they are fully secured and collection
These securities are carried at amortized cost using the effective inter- efforts are reasonably expected to result in repayment of debt within
est method. Dividends, interest income and amortization of premiums 180 days past due. Credit card balances are written off when a pay-
and discounts on debt securities are recorded in Net interest income. ment is 180 days in arrears. Loans guaranteed by a Canadian
We hold a nominal amount of held-to-maturity securities in our normal government are classified as impaired when the loan is contractually
course of business. All held-to-maturity securities have been included 365 days in arrears. When a loan is identified as impaired, the accrual
with Available-for-sale securities on our Consolidated Balance Sheets. of interest is discontinued and any previously accrued but unpaid inter-
Gains and losses realized on disposal of available-for-sale securi- est on the loan is charged to the Provision for credit losses. Interest
ties are included in Gain on sale of securities in Non-interest income. received on impaired loans is credited to the Provision for credit
Both available-for-sale and held-to-maturity securities are subject to losses. Impaired loans are returned to performing status when all past
periodic impairment review. due amounts, including interest, have been collected, loan impairment
Prior to November 1, 2006, all investment securities, other than charges have been reversed, and the credit quality has improved such
Trading securities, were recorded on our Consolidated Balance Sheets that timely collection of principal and interest is reasonably assured.
as Investment securities at amortized cost, and loan substitute securi- When an impaired loan is identified, the carrying amount of the
ties were accorded the accounting treatment applicable to loans and, loan is reduced to its estimated realizable amount, measured by dis-
where required, reduced by an allowance for credit losses. counting the expected future cash flows at the effective interest rate
We account for all our securities using settlement date accounting inherent in the loan. In subsequent periods, recoveries of amounts
except that changes in fair value between the trade date and settle- previously written off and any increase in the carrying value of the loan
ment date are reflected in income for securities classified or designated are credited to the Allowance for credit losses on our Consolidated
as held-for-trading while changes in the fair value of available-for-sale Balance Sheets. Where a portion of a loan is written off and the
securities between the trade and settlement dates are recorded in OCI. remaining balance is restructured, the new loan is carried on an
accrual basis when there is no longer any reasonable doubt regarding
Assets purchased under reverse repurchase agreements and sold the collectibility of principal or interest, and payments are not 90 days
under repurchase agreements past due.
We purchase securities under agreements to resell (reverse repur- Assets acquired in respect of problem loans are recorded at their
chase agreements) and take possession of these securities. Reverse fair value less costs of disposition. Fair value is determined based on
repurchase agreements are treated as collateralized lending transac- either current market value where available or discounted cash flows.
tions whereby we monitor the market value of the securities purchased Any excess of the carrying value of the loan over the recorded fair
and additional collateral is obtained when appropriate. We also have value of the assets acquired is recognized by a charge to the Provision
the right to liquidate the collateral held in the event of counterparty for credit losses.
default. We also sell securities under agreements to repurchase Fees that relate to activities such as originating, restructuring or
(repurchase agreements), which are treated as collateralized renegotiating loans are deferred and recognized as Interest income
borrowing transactions. over the expected term of such loans using the effective interest method.
Reverse repurchase agreements and repurchase agreements Where there is reasonable expectation that a loan will result, commit-
are carried on our Consolidated Balance Sheets at the amounts at ment and standby fees are also recognized as Interest income over the
which the securities were initially acquired or sold plus accrued inter- expected term of the resulting loan using the effective interest method.
est, respectively, except when they are designated using the fair value Otherwise, such fees are recorded as Other liabilities and amortized to
option as held-for-trading and are recorded at fair value. Interest earned Non-interest income over the commitment or standby period.
on reverse repurchase agreements is included in Interest income in our
Consolidated Statements of Income, and interest incurred on repur- Allowance for credit losses
chase agreements is included in Interest expenses in our Consolidated The Allowance for credit losses is maintained at levels that manage-
Statements of Income. Changes in fair value for reverse repurchase ment considers appropriate to cover estimated identified credit related
agreements and repurchase agreements carried at fair value under the losses in the portfolio as well as losses that have been incurred, but
fair value option are included in Trading revenue in Non-interest income. are not yet identifiable as at the balance sheet date. The allowance
Prior to November 1, 2006, all reverse repurchase agreements relates to on-balance sheet exposures, such as loans and acceptances,
and repurchase agreements were carried on our Consolidated Balance and off-balance sheet items such as letters of credit, guarantees and
Sheets at the amounts at which the securities were initially acquired or unfunded commitments.
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